Your monthly mortgage payment will likely be the largest payment you have each month. But just how much of your income should it take up? Is there a specific number? How do you tell what you can afford? Here we discuss the general rule of thumb as well as how to put it into real terms in your life.

## How Much do You Make?

First, you must address your income. How much do you make and how do you compare it to the mortgage payment? Let’s start with how much you make. Lenders look at your GROSS monthly income. This is income before taxes. It is the income reported on your W-2s. Take your last 2 years’ worth of W-2s and look at what you made. Do not worry if you held different jobs throughout the years. You will take an average of that income. Total the 2 numbers from each year (or more if you held more jobs) and divide by 24 months. This is the gross monthly income the lender will use for your eligibility.

If you have special circumstances, such as self-employment or commission payment, you should use your tax returns for the last 2 years. Look at your adjusted gross income. This is the income after any write-offs and/or expenses. This is the figure the lender will use as it allows them to adjust your income for any costs you have as a business owner or unreimbursed employee.

## Determine 28% of Your Monthly Income

Now that you know how much money you make in the eyes of the lender, calculate 28% of that amount. For example, if your W-2s for the last 2 years equal $50,000 and $60,000, you have an average monthly income of $4,583.

$50,000 + $60,000 = $110,000

$110,000/24 months = $4,583 per month

Take the monthly income and multiply it by 28% as follows:

$4,583 x .28 = $1,283

In this example, you could afford a mortgage payment of $1,283.

## What is a Mortgage Payment?

Do not run out just yet and take out a mortgage with a $1,283 monthly payment, though. There is more to it. You have to figure out the cost of the real estate taxes and homeowner’s insurance. They should be a part of your monthly payment whether you escrow them or not. Figure out the monthly cost by dividing the annual amount of each item by 12. For example:

Real estate taxes = $4,500

Homeowner’s insurance = $800

Per month, your real estate taxes cost $375 and homeowner’s insurance costs $67. This should come right off the top of your proposed mortgage payment. So from the $1,283, you should subtract $375 and $67.

$1,283 – $375 – $67 = $841

$841 is what you have left for principal, interest, taxes, and insurance.

## Calculate your Total Monthly Debt

You still are not done, though. If you have other monthly debts, such as credit cards or car payments, they must figure into your calculations. Overall, you should not spend more than 36% of your gross monthly income on your mortgage plus your regular monthly debts. You can figure this out by adding up your proposed mortgage payment with your other monthly debts. In the example of $4,583 income per month, you can afford $1,649 in total debts. Since your proposed mortgage equals $1,283, your other monthly debt should not exceed $366. If it does, you must adjust accordingly.

If you have a large amount of monthly debt, you can work the equation backwards. Look at your current monthly debts and subtract it from the total amount of debt you can have based on your income.

For example if you have $550 monthly debts, do the following:

$1,649 (36% of $4,583) – $550 monthly debts = $1,099 total mortgage payment

$1,099 – $375 taxes – $67 insurance = $657 principal and interest payment

This leaves you with $657 available for principal and interest. Since for every $700 you can usually afford a $100,000 mortgage, you are close to the $100,000 loan amount.

This amount is less than 28% of your monthly gross income only because of the amount of your current monthly debts. If you can pay your monthly debts down, you can increase the amount of the mortgage payment you can afford.

You can also put a significant amount of money down on the home. The higher your down payment, the more home you can afford. You can add the amount of your down payment directly to the loan amount you qualify for based on the 28% rule. The more you put down, the less risky you become to the lender. In fact, if you put at least 20% down, you do not have to pay Private Mortgage Insurance, which leaves you even more room for principal and interest. This means a higher loan amount.

Of course, these numbers work on paper, but you have to make sure they work in your life. Take the numbers you calculate and work them into your budget. Do you have room for the proposed mortgage payment? Can you still afford your other monthly bills as well as daily living expenses? Avoid stretching your finances too thin as you put yourself at risk for mortgage default when you do this. If you do default on your mortgage, you could lose your home. Finding the mortgage payment that is the most affordable for you without sacrifice is usually the best idea overall.