• About
  • Mortgage Basics
  • $40K Challenge
  • Aunt Doris
  • Grandfather Says
  • Privacy
  • Archives
  • 100 Words

Len Penzo dot Com

The offbeat personal finance blog for responsible people.

How Much Can I Afford to Borrow for a New Home?

By Len Penzo

Readers: This is article 9 of 25 from my no-nonsense “Mortgage Basics” quick-reference series.

mortgage basicsAlthough there are exceptions to every rule, mortgage providers generally require your total debt to be no more than 36% of your pre-tax income. Your total debt includes:

Housing Expenses

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.

Current Obligations

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:

  1. Multiply your pre-tax income by 0.36; this is your maximum allowable debt
  2. Add up all of your current obligations
  3. 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.

Photo Credit: GotCredit

April 27, 2016

Comments

  1. 1

    Ramona says

    Really great info. Many people I know were thrown off course really badly because they prepared only for the mortgage itself and then were hit by additional taxes, insurance, home repairs, electricity bills that were bigger than expected etc.

  2. 2

    Len Penzo says

    Agree. Good comment, Ramona.

  3. 3

    Joe says

    It’s important you are honest with yourself and include all expenditures and possible emergencies with your family and the new home-don’t want to put anything on a credit card with high interest rates.

The Question of the Week:

Do you think credit unions are safer than traditional banks?

View Results

Loading ... Loading ...

Recent Posts

  • The Big Advantages of Natural Gas Appliances
  • Is a Master’s Degree in Education Worth It? 7 Key Questions to Ask
  • Comparing the Flat Tax, Fair Tax, and Progressive Tax Systems
  • Are Energy Efficient CFL Bulbs Worth Paying More For?
  • Black Coffee: Pushing the Panic Button
  • The Continuing Chronicles of Elaine, Part 10
  • 3 Ways That Make Credit Cards Vulnerable to Fraud
  • Common Financial Mistakes in Manufacturing (and How to Avoid Them)
  • Blind Taste Test: Does Bottled Water Really Taste Better Than Filtered Tap?
  • Black Coffee: Banking on the Future

Disclaimer

This site is for informational and entertainment purposes only, and the content herein should not be mistaken for professional financial advice. In fact, making investment decisions based on information published here, or any other website for that matter, is more than unwise; it is folly. This website accepts advertising in the form of monetary and other compensation; as such, topics of discussion are occasionally influenced by these advertisers. Sometimes, an article may also include affiliate links, meaning, at no additional cost to you, this blog earns a commission if you click through and make a purchase (for example, as an Amazon Associate I earn from qualifying purchases). Remember, you and you alone are responsible for the decisions you make in life, so please contact an independent financial professional for advice regarding your unique personal situation.

Sign up for the weekly Len Penzo dot Com newsletter
Len Penzo dot Com Delivered Weekly
Join more than 40,000 readers and fans who enjoy personal finance and macroeconomics with an offbeat twist!
Invalid email address
Thanks for subscribing!

Popular Now:

  1. 1. 18 Personal Finance Facts About US Presidents
  2. 2. Credit or Debit: Which One Is Actually Better?
  3. 3. Why Buying Gasoline in the Morning Can Save You Money
  4. 4. Why Paying Off the Mortgage Early May Be a Big Mistake
  5. 5. What Defines True Financial Success?
  6. 6. A Georgia Teacher Shows Why It Always Pays to Read the Fine Print
  7. 7. Debt Elimination: The Pros and Cons of Dave Ramsey’s Baby Steps
  8. 8. Home Repair Scams: Here Are the 9 Biggest
  9. 9. Historical Gold & Silver Benchmarks for Wages and Commodities
  10. 10. 4 Good Reasons Why Some Quarters Are Painted Red

All-Time Most Popular:

  1. 1. 19 Things Your Millionaire Neighbor Won’t Tell You
  2. 2. Dear Friend: Here Are 41 Reasons Why I’m NOT Lending the Money
  3. 3. Why Your Expensive Luxury Car Doesn’t Impress Smart People
  4. 4. If You Can’t Live on $40,000 Annually It’s Your Own Fault
  5. 5. 21 Reasons Why Corner Lots Are for Suckers
  6. 6. 4 Smart Reasons Why College Isn’t for Everyone
  7. 7. 18 Fast Facts About Social Security Numbers
  8. 8. My Ketchup Taste Test: Upset! Guess Which Brand Topped Heinz
  9. 9. Why I Prefer a Spreadsheet to Track Expenses and Manage My Finances
  10. 10. Here’s a Simple Trick for Getting Credit Card Interest Charges Waived

Copyright © 2023 Len Penzo dot Com · All Rights Reserved · Designed by Nuts and Bolts Media

© Len Penzo dot Com 2008–2023