What percentage of your monthly income should you be spending on housing?
Here’s the thing: When you get pre-approved for a home loan or you talk to a bank about a mortgage, they’re typically going to figure out the maximum that they can approve you for. To calculate that, they’ll take your total monthly debt obligations and add that to your proposed monthly payment, which is principal interest, property taxes, and insurance (PITI).
When they get those two numbers and add them up, they like to see those two numbers be less than about 42% of your gross monthly income. That depends on your credit and a number of other variables, so talk to your mortgage broker to find out exactly what that percentage is.
Use that 42% as a rule of thumb—42% of your monthly income can be allocated for housing and debt obligations monthly.
The next question is: Is that helpful for you and your family in the future? I always suggest that our clients don’t go up to that 42% mark. If you do, you’re typically going to have trouble saving and creating an emergency fund if something were to go wrong. It’s easy to get stressed out if you don’t have any margin in your budget at all.
We typically advise our clients, even though they may be pre-approved up to 42% of their gross monthly income, to keep their monthly debt obligations and housing allowance below about 32%. Way back in the 80s, the number was actually 25%. Its gone up for a number of reasons.
If you can stay below 32%, you’ll generally have some margin to plan for things that can’t be planned for. Obviously this differs from person to person; some people may expect to get a raise in the near future or pay off a loan. You should talk to your accountant or financial advisor just to make sure you run a budget before you make a final decision.
If you have any questions about real estate or anything at all, reach out to us by phone or email. We’ll follow up and take great care of you.