How much house can I afford?

One financial rule of thumb I hear often is “Your mortgage payment shouldn’t exceed 28% of your gross monthly income.” This advice is everywhere you look on the web when searching for mortgage calculators or information about how large of a mortgage you can take out. The rule originates from a calculation for your debt-to-income ratio that mortgage lenders generally use to determine the amount you’ll qualify to borrow. It states that a household should spend no more than 28% of their gross monthly income on their mortgage payments (including taxes and insurance). In other words, under this rule, if your gross monthly income (before taxes and other paycheck deductions) was $5,000, the rule assumes you can afford a $1,400 per month mortgage payment. Just because you qualify for a mortgage payment that large, doesn’t mean you can afford it.

A better option, in my experience, is to not exceed 28% of your monthly take-home pay for a much more comfortable mortgage payment number…especially if you have other monthly debt obligations like student loan or car payments. As an example, a $5,000 gross monthly income, after factoring out an assumed 27% paid to federal and state taxes and 10% going to a company retirement account, your take home pay would be about $3,285 per month. A $1,400 monthly mortgage payment coming out of a $3,285 take-home paycheck accounts for over 40% of what was brought in to pay for expenses! If you were to use my rule of thumb in this example (no more than 28% of your take-home pay), you would want to look for a mortgage payment closer to $920 per month.

To minimize the monthly stress of a mortgage, make sure you are considering other financial obligations, your lifestyle needs, both present and future, and spending habits. All these factors will lead you to a more accurate and reliable answer to the question – How much house can I afford?

- Margaret Gooley, CFP®, Worley Erhart-Graves Financial Advisors