Percentage Of Income To Spend On Housing

Up to what percentage of your income should be spent on housing? Is there a formula to follow?

1 Answer

What a great question! A lot of people just ask the mortgage broker how much they can qualify for, but a more important question is "how much can we afford."

When you apply for a home loan, the loan officer or mortgage broker will get a lot of information from you including past credit history, work history, and income amounts. They do this so that they can be sure that you can afford the loan you are applying for. The number that determines whether you will have enough to pay the mortgage after you have met all of your other obligations is called a debt to income ratio. Different companies have different allowable ratios, and even different loans within the same company may have different ratios.

The best determining factor, however is your own budget. Take a good look at what you spend right now. Write down how much you spend each month on utilities, groceries, travel and commuting, and any other recurring bills that you will have to keep paying after you buy a house. Consider everything, including entertainment, clothing, and other expenses that don't necessarily occur every pay period. Now subract that amount from your pay each month. Can you afford that payment?

If you can, that's great! A house is a great investment. If you cannot, then maybe you should consider a more modest choice for housing. Or maybe, now that you have written it all down, you can see where you might be able to cut some corners, and make that payment fit into your budget. Either way, good luck in your new home.