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Now it’s time to take action! Establish a budget and determine your maximum amount available for monthly housing costs.

Step-by-Step Guide:


The first step is to take stock of your current situation. Gather your bills and your pay stubs and get ready to make some lists.

Start with your total net income. How much money do you (and any other members of your household) bring home each month?

Then make a list of your fixed expenses—i.e., the expenses that are the same every month—including the amount of each payment. This can include:
  • your mortgage or rent
  • car payments or other transit costs and
  • student loan payments.

If you have expenses that you pay quarterly, semiannually or annually, such as insurance premiums, tuition or property taxes, be sure to budget money for these expenses each month, too.

 Now calculate your mortgage qualifying ratios:
  • Your housing expense ratio = your mortgage or rent / your gross monthly income
  • Your total expense ratio  = your fixed expenses / your gross monthly income

If your housing expense ratio is 28 or less, and your total expense ratio is 36 or less, you are most likely living within your means and not overstretching your budget. These standards are not strict limits, but they are useful guidelines to determine how much house you can afford. However, you have yet to consider your variable expenses.

Next, make a list of expenses that vary from month to month. This list will include such items as:
  • food;
  • gasoline and other transit expenses;
  • entertainment and recreation;
  • clothing; and
  • credit card payments.

Go back through your bills and your checkbook for the past three months, and make an average of what you spent on each of these variable expenses. Then record an average amount next to each item.

If you’re experiencing a financial crisis, odds are that your expenses exceed your income. Are there any expenses that can be reduced, such as entertainment, clothing and recreation?

By setting up a tight budget, you may be able to meet your expenses with your current income.

Naturally, the goal is to take care of the basics—like staying in a safe home, having enough food to eat, being able to get to your job, keeping up your insurance payments and so on. Then see how much money you have left each month to pay your debt.

Use this worksheet to calculate your monthly income and expenses and determine the maximum amount available for monthly housing costs.

Key takeaways:

  • Traditionally, lenders have used the housing expense ratio and the total expense ratio to help them decide whether to approve a mortgage. The housing expense ratio was expected to be 28 or less, and the total expense ratio was expected to be 36 or less. These standards are not strict limits, but they are useful guidelines to determine how much house you can afford.
  • Your goal should be to establish your own spending limits that allow you to continue saving, and to continue to live a lifestyle that makes you happy while owning your home.

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