How Much of Your Income Should Be Spent on a Mortgage?

Manageable mortgage payments bring enjoyment to home ownership.
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First comes love, then comes marriage ... but before expanding the family enters the picture, many couples aspire to purchasing their own nest -- and feathering it well. The question of how much of your income you can comfortably spend on a mortgage is of primary consideration when purchasing a new home. After doing the number crunching, you may come up with a solid figure. However, Sally Borie, Education Coordinator for the Austin branch of Consumer Credit Counseling Services, says that this number is largely at the lender's discretion.

Mortgage-to-Income Ratio

To qualify for a home loan, lenders consider your front-end ratio and back-end ratio, says Borie. Your front-end ratio considers how much you'll spend on the cost of your mortgage principal, interest, taxes and insurance. Generally speaking, the sum of these costs cannot exceed 33 percent of your gross monthly income. "Most conventional loans want it right around 28 percent," Borie says.

Lenders also look at your back-end ratio, which considers not only your principal, interest, taxes and insurance, but the debt you owe, such as credit card debt and automobile loans. This sum should fall between 46 and 48 percent of your gross income. "If [couples] have a lot of debt, and it goes up to more than 48 percent, they probably won’t qualify for a loan," Borie says.

Too Much House?

Mortgage payments don't change when money gets tight, so it's important for you and your other half to know how much house you can afford, both now and in the future. According to Borie, a good starting point is to multiply your joint gross income by 2.5 and only look at homes in that price range. But home shoppers, beware: The person who ushers you into your prospective dream home is most likely a real estate agent – and it's in the salesperson's best interest to get you into the biggest spread he can. "Your Realtor is great, but please don’t take financial advice from the Realtor – this is the last person you should tell you how much house you can afford," says Bruce McClary, credit counselor for Clearpoint Credit Counseling Solutions, based in Seattle.

Two Incomes or One

Another thing to factor into your decision is the possibility – or likelihood – that two incomes will drop down to one after the baby carriage does roll in. If couples decide that one career will be placed on the back burner in lieu of child-rearing duties, "They need to do the math and see how [their mortgage] is going to affect them when that income is no longer coming in," Borie says.

Play It Safe

McClary takes a more conservative view and urges couple to look at their net income rather than their gross – this is the amount of take-home money you actually have in hand – when calculating mortgage payments as a percentage of income. "Thirty percent is the sweet spot. Anything less is fantastic. Anything over, you have to start number crunching with your budget," he says, adding "Spend no more than 20 percent of your net income on credit card payments and other expenses."

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