Mortgage payments are usually a significant expense -- for many people, it's the largest check they write every month. While this isn't necessarily a bad thing, it can also be taken to an extreme. A mortgage payment that consumes half your monthly salary might be affordable, but it can also quickly turn into a burden. You might also have trouble finding a lender that allows you to borrow that much money relative to your income.
Your lender might not even let you take out a mortgage with a payment that consumes half of your salary. Before approving your loan, most lenders check your ability to repay it by calculating your debt-to-income ratio. To calculate your DTI ratio, they divide all your monthly debt payments, including the new mortgage you're trying to get, into your monthly gross income. If you want to have a $1,500 mortgage payment, have a $299 car payment and $175 in other monthly debts and make $4,850 per month at work, the bank will divide your $1,974 in payments into $4,850 to calculate your DTI ratio of 40.7 percent. While total DTI ratios vary by lender, it can be hard to get qualified with a DTI above 45 percent, and many lenders like even lower ratios.
If you can get qualified for a mortgage payment that equals half or more of your monthly salary, you won't have a lot of room for error. With well over half your after-tax paycheck gone, there simply isn't a lot of money left over. Even if you're able to cover your other bills and your savings, you might not be prepared for unexpected expenses. If your house needed a new roof, for example, you might not have the ability to save enough to pay for it and, on the other hand, might also not have the income to make monthly payments if you have to finance the work.
With a high monthly payment, your paycheck is already committed before you get it. If your paycheck drops or goes away, you won't have a lot of room to reduce expenses to make up for it. A job loss could very quickly leave you in a position where you can't make your mortgage, even if you're able to collect unemployment insurance. Furthermore, with a high mortgage payment, you won't be able to stretch your savings as far.
When High Mortgages Work
Sometimes a high mortgage payment might be a good choice for you. If you're sure that your salary will be going up, making a high payment for a little while to ensure that you're in the right place for the long term might be an acceptable inconvenience. Also, when your salary isn't your only source of income, the size of your mortgage compared to your salary becomes less important. For instance, if you're buying a fourplex and occupying one of the units, it's conceivable that the mortgage could be more than half of your monthly income, but since the rent from three of the units is paying your mortgage for you, the property might be a good risk for you.
- The Mortgage Professor: Mortgage Qualification Repair: Meeting the Income Requirement
- Bankrate.com: 3 Reasons Low Mortgage Rates are Key
- MyMortgageInsider: Buy a Multi-Unit Home and Earn Rental Income
- Consumer Financial Protection Bureau. "What is a debt to income ratio?". Accessed January 27, 2020.
- Consumer Financial Protection Bureau. "What Is a Qualified Mortgage?". Accessed January 27, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.