Mortgage Tips

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What Percentage of Your Income Should Go Toward a Mortgage?

When buying a home, one of the most critical financial decisions is determining how much of your income should go toward your mortgage. Striking the right balance ensures that you can comfortably afford your home without stretching your budget too thin. Lenders use various guidelines to help buyers determine affordability, but personal financial goals and lifestyle should also factor into the decision.

General Mortgage Affordability Guidelines
A common rule of thumb is the 28/36 rule, which lenders often use when evaluating mortgage applications:

  • 28% Rule: Your monthly mortgage payment (including principal, interest, property taxes, and homeowners’ insurance) should not exceed 28% of your gross monthly income.
  • 36% Rule: Your total debt payments (mortgage, credit cards, student loans, auto loans, etc.) should not exceed 36% of your gross monthly income.

For example, if you earn $6,000 per month before taxes, your recommended mortgage payment would be around $1,680 (28%), and your total monthly debt obligations should be no more than $2,160 (36%).

Factors That Influence How Much You Should Spend
While the 28/36 rule provides a helpful guideline, several factors may influence how much of your income should go toward your mortgage:

1. Your Debt-to-Income (DTI) Ratio
Lenders use your debt-to-income (DTI) ratio to assess affordability. Some loan programs allow for higher DTIs:

  • Conventional loans typically require a DTI under 43%.
  • FHA loans may allow DTIs up to 50% in some cases.
  • VA loans consider DTI but also look at residual income, offering more flexibility.

A lower DTI makes you a more attractive borrower and may help you qualify for better interest rates.

2. Your Down Payment
A larger down payment reduces the loan amount, which can lower your monthly mortgage payment and improve affordability. If you put down 20% or more, you also avoid private mortgage insurance (PMI), further reducing costs.

3. Your Lifestyle and Financial Goals
Your mortgage payment should allow you to maintain a comfortable lifestyle while saving for retirement, emergencies, and other financial goals. If you prioritize travel, investing, or other expenses, you may want to keep your mortgage below the recommended 28% threshold.

4. Location and Cost of Living
Housing costs vary significantly by location. In high-cost areas, buyers may need to allocate a larger percentage of their income to housing, while in lower-cost regions, a smaller percentage may suffice.

Finding the Right Mortgage Payment for You
To determine an affordable mortgage payment:

  1. Calculate Your Monthly Income – Use gross (pre-tax) income as a starting point.
  2. Factor in Existing Debts – Consider car loans, student loans, credit cards, and other obligations.
  3. Estimate Homeownership Costs – Beyond mortgage payments, account for property taxes, insurance, HOA fees, and maintenance.
  4. Use a Mortgage Calculator – Online tools can help you estimate affordability based on income, interest rates, and loan terms.

While the 28/36 rule provides a solid framework, your ideal mortgage payment should align with your personal financial situation and long-term goals. Before committing to a home loan, assess your budget, factor in all homeownership costs, and ensure you have room for savings and discretionary spending. Consulting with a mortgage professional can help you determine the right loan amount and structure to fit your needs.

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Financial Reports

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What’s Ahead For Mortgage Rates This Week – April 28th, 2025

While many useful indicators are set to be released this week, the previous week left us only with the Leading Economic Indicators, which showed signs of the economy slowing down in the future. Consumer Sentiment reports also indicated widespread dissatisfaction across all levels of income and education, largely due to the impacts of recent tariff decisions, which have been on hold.

We should expect next week to provide a clearer picture as decisions are made in the trade war between China and the United States. The PCE Prices, Non-farm Payrolls, Chicago Manufacturing PMI, Personal Income, and GDP estimates will offer more insight into the impact of the tariffs.

Concerns about inflation remain, but given the current stance on monetary policy, the Federal Reserve is much more likely not to react to inflation immediately, keeping its focus largely on the policies being set by the current administration.

Leading Economic Indicators

Leading Economic Index (LEI) for the US declined by 0.7% in March 2025 to 100.5, after a decline of 0.2% (revised up from -0.3%) in February. The LEI also fell by 1.2% in the six-month period ending in March 2025, smaller rate of decline than its -2.3% contraction over the previous six months.

Consumer Sentiment

Consumer sentiment plunged 8% in April from the prior month, to a final reading of 52.2, the University of Michigan said in its latest survey released Friday. That was a slightly smaller decline than a preliminary reading from earlier this month, which didn’t capture people’s reaction to Trump’s 90-day tariff delay announced on April 9.

Primary Mortgage Market Survey Index

• 15-Yr FRM rates saw a decrease of -0.09% for this week, with the current rate at 5.94%
• 30-Yr FRM rates saw a decrease of -0.02% for this week, with the current rate at 6.81%

MND Rate Index

• 30-Yr FHA rates saw a decrease of -0.11% for this week. Current rates at 6.25%
• 30-Yr VA rates saw a decrease of -0.11% for this week. Current rates at 6.27%

Jobless Claims

Initial Claims were reported to be 220,000 compared to the expected claims of 220,000. The prior week landed at 216,000.

What’s Ahead

PCE Prices, Non-farm Payrolls, Chicago Manufacturing PMI, Personal Income, and GDP estimates are set to release next week. With other releases in the Global US Manufacturing PMI which historically isn’t a significant indicator but with a major shift in the dynamics of world trade, we can see major changes in those data release.

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Home Buyer Tips

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Can I Finance Home Renovations Into My Mortgage at Closing?

Purchasing a home that needs renovations or upgrading your current home can be costly, but financing home improvements through your mortgage can be an effective solution. Instead of taking out a separate loan for renovations, some mortgage programs allow you to roll the cost of home improvements into your home loan at closing. This strategy can help you spread renovation costs over time while securing a potentially lower interest rate compared to personal loans or credit cards.

How Financing Renovations Into Your Mortgage Works
When you finance renovations into your mortgage, the loan amount includes both the purchase price (or refinance amount) and the estimated cost of home improvements. The lender typically requires contractor estimates for the work, and funds for renovations may be placed in an escrow account and disbursed as the project progresses.

Loan Options for Financing Home Renovations
Several mortgage programs allow borrowers to finance home improvements at closing:

FHA 203(k) Loan—This government-backed loan is ideal for buyers or homeowners who want to finance major renovations. It comes in two options:

  • Limited 203(k) Loan—Covers minor repairs and upgrades up to $35,000.
  • Standard 203(k) Loan—Designed for extensive renovations, requiring a licensed contractor and consultant oversight.

Fannie Mae HomeStyle Renovation Loan—Available for both homebuyers and homeowners, this loan allows you to finance nearly any type of renovation, including luxury upgrades. It requires a higher credit score but offers competitive interest rates.

Freddie Mac CHOICERenovation Loan—This program offers flexible financing for home improvements, including repairs to protect against natural disasters, with options for borrowers to complete some work themselves.

VA Renovation Loan—Eligible veterans and service members can finance renovations through their VA loan, though restrictions apply, and lender participation is limited.

Conventional Cash-Out Refinance—Homeowners with existing equity can refinance their mortgage for a higher amount and use the extra cash for renovations.

Benefits of Financing Renovations Into Your Mortgage

  • Lower Interest Rates—Mortgage rates are typically lower than personal loans or credit cards, making this a cost-effective option.
  • Single Loan Payment—Instead of managing multiple loans, you have one mortgage payment covering both the home and renovations.
  • Increased Home Value—Renovations can boost your property value, potentially improving your home s long-term equity.

Considerations Before Choosing a Renovation Mortgage

  • Loan Requirements—Some programs require higher credit scores or contractor oversight.
  • Project Scope and Costs—Lenders may require detailed renovation plans and cost estimates.
  • Disbursement Process—Funds are often released in stages, which can impact project timelines.

Financing renovations through your mortgage can be a smart way to improve your home without taking on additional debt. Whether you re purchasing a fixer-upper or upgrading your current home, exploring renovation loan options can help you achieve your goals while maintaining financial stability. Consulting with a mortgage professional can help you determine the best financing solution for your needs.

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