How much of your monthly income should you spend on a mortgage?


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One of the challenges home buyers face when purchasing a house for the first time is how much of their income should go toward a mortgage payment. This number varies greatly and just because the bank tells you that you can take on a certain payment to income ratio, that doesn’t necessarily mean that you should. Here is why:

Debt-to-income ratio

First things first. A debt to income ratio is the percentage of your debt is in relationship to your monthly income. For example, let’s say you make $10,000 per month. If your mortgage is alf of $10,000 per month, or $5,000, that represents a 50% debt-to-income ratio. Some loans including FHA loans and conventional loans will allow you to take on a mortgage payment up to 50% of your monthly income. The calculation is computed by taking the total mortgage payment comprised of principal interest taxes and insurance and any applicable private mortgage insurance plus any minimum payments you might have on any other credit account obligations adding the sum of those two numbers together and dividing it into your monthly income. If this number exceeds even .1% on a conventional loan you’re not going to be able to get a mortgage unless you bring that number down to 50% debt to income ratio or lower.

Mortgage tip: FHA loans and VA loans sometimes may allow up to 55% debt to income ratio.

While mortgage lending guidelines may allow you to take on up to half of your income in debt load, a good general rule of thumb might be to consider taking on a mortgage payment that would be no more than 36% of your current monthly liabilities as well as the proposed housing payment.

For example, going back to our scenario at $10,000 per month that would mean not taking on the mortgage payment more than $3,600 a month including the other monthly expenses in your life. The reason why this number is conservative is that it takes into consideration gross income and more importantly your ability to save. Put another way it would be easier to save money each month if your debt-to-income ratio was in the 36% range then it would be if your debt-to-income ratio is in the 50% range. So, what happens when your debt to income ratio is right around the 40 or 42% mark?

Some things to consider:

  • Can you pay off debt to qualify with your cash? If yes this can very easily lower your debt to income ratio and can make a mortgage payment more manageable with the other monthly bills in your life.
  • Are you going to be receiving a raise at some point? If your income is going to be changing in the future perhaps you’re changing jobs you’re going into a more affordable situation as your income is poised to rise in the future, it might not be a risky situation to put yourself into a higher debt to income ratio situation for a house purchase if there is something in the future that’s going to change the financial picture for the better.
  • Can you rent out a room in the property?

At the end of the day whether your debt to income ratio is 36% of your income or 40% of your income whatever the debt to income ratio number is if you’re saving money from your next paycheck that is the optimal situation that you want to be in while still being able to maintain a budget and a life and the mortgage at the same time.

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