By Damion Campbell, AMS Mortgage

It's the question I hear almost every week: how much of my salary can I spend on a mortgage? The answer your lender gives you and the answer you should actually live by can be very different numbers.

The lender's number

A common guideline is a housing payment of about 28% of your gross monthly income, and about 43% once your other debts (car loans, student loans, card minimums) are included. On $5,000 a month gross, that's roughly $1,400 for the mortgage payment. Being approved for that amount doesn't mean it's the right amount to borrow.

Gross is not what you spend

Lenders measure against income before taxes, retirement contributions and health insurance. You pay the mortgage from take-home pay. On that $5,000 gross, take-home might be about $3,600, so a $1,400 payment is closer to 39% of the money you actually have.

A more cautious rule of thumb

In my experience, borrowers who keep the mortgage payment to roughly 20% to 25% of their net take-home income have the most room for everything else. That's my own rule of thumb, not a lending requirement. On about $4,600 a month of take-home pay, it means a payment of about $920 to $1,150, instead of the $1,750 a lender might approve.

What the approval doesn't count

  • Utilities, maintenance and repairs
  • HOA fees, if any
  • Your other debts, which count against you even before the mortgage
  • A cushion for a job change or an emergency

The best time to work this out is before you start looking at homes, not after you've fallen in love with one at your maximum approval.

Damion covers this in more detail in his original article on VeeCasa.

Read the full article by Damion Campbell →

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