Readers: This is article 9 of 25 from my no-nonsense “Mortgage Basics” quick-reference series.
Your housing expenses include your mortgage payment, homeowners insurance, and property taxes. If your down payment is less than 20% of the purchase price, then you’ll need to factor in the cost of private mortgage insurance too.
This includes all other monthly debt payments not related to housing such as credit card bills, car loans, child support and alimony, and student loans. Although it’s not necessary, to be conservative, some people include additional expenses like childcare, healthcare, school tuition, and retirement savings.
To estimate your monthly housing budget:
- Multiply your pre-tax income by 0.36; this is your maximum allowable debt
- Add up all of your current obligations
- Subtract (2) from (1)
The resulting number is the maximum monthly housing expense you can expect to afford assuming a debt-to-loan ratio of 36%.
Yes, some lenders may be willing to stretch this number to 40% or more; but keep in mind that the added debt load increases your financial risk in the event your income decreases in the future.
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