How much of my income should I spend on a mortgage payment?

Key insights

  • Most experts recommend spending a maximum of 28-35 percent of your pre-tax income on your housing expenses
  • It’s important to keep in mind that other debt obligations — like student loans, car payments and credit card minimum payments — will also be factored in when you apply for a loan
  • While expenses like groceries, gym memberships and cell phone plans won’t be considered by a lender, it’s important to minimize this spending so you can easily meet your monthly debt obligations

Understanding your housing expenses

When a lender reviews your loan application, their main job is to verify that you are a low-risk candidate who will be able to cover your monthly housing expenses for the full life of the loan. To do this, they will first calculate your monthly PITI:

  • Principal of the loan
  • Interest on the loan
  • Taxes (estimated from annual payment)
  • Insurance (estimated from annual payment)

While every lender is different, and every loan application is reviewed independently, the general rule of thumb is that your monthly PITI should be between 28-35 percent of your monthly income before taxes.* This number is known as your front-end debt-to-income ratio.

Understanding your debt obligations

Of course, you may have other long-term loans or debt obligations that you pay each month. Lenders will also take these debts into consideration as they review your loan application.

The easiest way to think of a debt obligation is to consider who you are paying back. Common debt obligations include:

  • Student loans
  • Car payments
  • Child support payments
  • Credit card minimum payments (if you have a long-term balance you are trying to pay off)
  • Medical or hospital bills

To calculate your back-end debt-to-income ratio, the lender will add up your monthly debt obligations, including your hypothetical monthly PITI. They will divide that by your total monthly income before taxes.

Typically, lenders are looking for a back-end debt-to-income ratio of 35-45 percent*. But again, every lender varies and your personal financial history and income history will also be factored in.

What about other expenses?

You have daily, weekly and monthly expenses that won’t necessarily be taken into account by a lender — but that doesn’t mean you shouldn’t think about them as you begin the path to homeownership.

Before you apply for a mortgage, take stock of your monthly expenses, including:

  • Groceries
  • Gas or transportation costs
  • Restaurants, coffee shops and gas station pit-stops
  • Mobile phone plans, cable television plans and streaming services
  • Shopping and gifts

No one is perfect and it’s likely that you could tighten up one or two of your spending categories without too much effort. Your lender may not notice, but you’ll find it easier to afford your monthly PITI and debt obligations when you minimize your other expenses.

How can I calculate my buying power?

If you’re looking for an easy-to-use tool that takes into account your front-end and back-end debt-to-income ratios, check out this great calculator from Edina Realty Mortgage.


Downsizing Your Home

Whether you just became an empty nester or your home has taken on an echo over the last five years, nearly everyone reaches a point where they want to downsize. If you plan to move to a smaller home in Minnesota or western Wisconsin, here are insights you can use as you downsize your home.

1. Take your time and follow the “OHIO rule”

First, don’t be unrealistic about how long it will take to downsize. Allow a couple of months to get rid of your keepsakes, furniture, clothing and more. Next, try to follow theOHIO rule — only handle it once. As you review each item, determine if it will be kept, thrown away or donated. By avoiding the “maybe” pile, you’ll save time as the moving day approaches.

2. Expand your trash and recycling package

Call your trash and recycling providers and expand your services for the months leading up to the move. Remember that a dumpster or extra garbage pail will be helpful if you have a lot of items to toss, but you'll be more likely to recycle or donate your goods if your trash space is limited.

3. Pass on the memories

For parents and grandparents, a big part of downsizing is getting rid of the artwork, trophies and report cards that are taking up storage space. Invite your kids, nieces and nephews or grandchildren over to sift through their family relics and take home anything they wish to keep.

It may be important to reassure your family that you don't want to trash their memories; you simply want them to find a new home. To reinforce this desire, buy large plastic storage containers for each family member to fill up. Keep the mood light and nostalgic as you review the items and help determine what should be kept for the next generation.

4. Get rid of the paper

Unless you’ve fully digitized your records, you likely have a file cabinet full of pay stubs and tax records, newspaper clippings and more. Take a day (or two) to go through this paperwork and try to trash the majority of it. The IRS says that even the most complicated tax filings must only be kept for seven years, so it’s safe to clear out anything older than that. Protect against identity theft by shredding all the documents you recycle.

5. Tackle the kitchen and bathrooms

Need a quick win? Focus on your bathrooms and kitchen — even the most sentimental of downsizers shouldn’t have too much trouble getting rid of old shampoo samples and extra baking dishes.

One minor exception is if you have family cooking traditions, like baking spritz cookies during the holidays. Determine if you want to bring the related gadgets to your new residence, or offload them to a relative who will continue the tradition on your behalf.

6. Discard extra clothing

With very few exceptions, you should get rid of any clothing items you haven't worn in the last two years. If you're recently retired, consider donating suits and work outfits to an organization like Dress for Success. This is also a great time to downsize old t-shirts and sweatshirts. We all love Goldy, but your new residence won’t have room for five drawers of Gopher gear.

7. Save the furniture for last

Unless you have several bedrooms of extra furniture, wait until you find your new home before you downsize your furniture. Then, determine what existing pieces will fit your new home or if it’s time to upgrade to modern furniture that matches your new residence. Remember, college kids and young professionals are always grateful for free furniture you send their way!

Getting started

Whether you're moving up or downsizing, we’ll be there for you every step of the way.Reach out today to discuss selling your home – no pressure, and no obligation.

Looking for more advice as you prep your home to sell? Follow #SellerInsights on Facebook, Instagram, Twitter and YouTube to get more expert advice and insights.