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How to Determine Your Monthly Housing Budget

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Determine Your Monthly Housing Budget

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What measures determine home affordability? Mortgage lenders have traditionally expected borrowers to have a housing expense ratio of 28% or less. The housing expense ratio indicates a borrower’s ability to make the payments on their mortgage loan. The ratio measures housing expenses as a percentage of gross income (income before Social Security, Medicare and tax deductions). For example, if a borrower’s salary were $4,000 per month, a lender would want to see the housing expenses (mortgage payment, insurance, property taxes, etc.) were less than $1,120 per month. $1,120/$4,000 = 0.28.

In addition to the housing expense ratio, lenders also consider a borrower’s total expenses: housing expenses plus fixed monthly obligations. By traditional lending standards, total expenses could not exceed 36% of gross income. In other words, continuing the previous example, a borrower with housing expenses of $1,120 per month and fixed monthly bills of $350 would have $1,470 in total expenses per month. The total expense ratio would be 36.75% ($1,470/$4,000 = 0.3675), and the lender would not approve the loan.

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    In recent years, however, lenders have relaxed the rules, allowing many people to get approved for mortgages they really couldn’t afford. That left the borrowers and lenders in financial trouble, with homeowners defaulting on their mortgages and some lenders struggling to avoid bankruptcy. As a result, lenders have become more careful about extending loans and have adopted more conservative lending standards.

    Why Should I Analyze My Budget Carefully?

    People often want more house than they can afford. (You can use this calculator to figure out how much house you can afford, based on your potential down payment, income and debt obligations.) Perhaps it’s human nature to want to stretch: In our consumer-oriented society, there are a lot of forces telling you to buy a bigger, or faster, or better thing than what you need. As tempting as it all is, you must avoid this mindset. Overspending creates financial problems that can be a source of stress and have negative effects on your marriage, family relationships and, of course, your financial health.

    A few things can happen when you can’t afford your mortgage payments. First of all, payment history is the most influential factor in credit scores, and a payment that’s 30 days past due can knock dozens (even 100) points off your credit score. If you continue to miss payments, your credit score will suffer further, which is why it’s crucial to make sure you can afford your mortgage. (Just as it’s important to check your credit before applying for a home loan, you’ll want to see how your mortgage affects your credit throughout the life of the loan. You can get two of your credit scores for free on

    As soon as you realize you’re in danger of missing home loan payments, explore the options you may have to save your home from foreclosure. You may be able to refinance (if your credit is in good standing), ask your lender for a break, take advantage of a loan modification program or find a way to cut your losses and move on. All these options have significant implications for your financial stability, but having a foreclosure in your credit history can cause you financial stress for years, as well.

    The likelihood of foreclosure shouldn’t be your only concern when determining how much house you can afford. Your ultimate goal is to make sure that homeownership is a joy. Establish your own spending limits that allow you to continue saving, and to continue to live a lifestyle that makes you happy. It’s up to homebuyers to make sure they aren’t stretching beyond what they can truly afford.

    How Do I Determine My Monthly Housing Cost Limits?

    Budgeting is the key to having a happy, secure financial life. Prepare a household budget and stick to what you can conveniently afford, despite the temptation to buy a bigger home or spend more money on other amenities.

    These guidelines can help you to develop your own housing cost limits:

    • First, calculate your provable gross income from your employment. Things such as overtime and bonuses that haven’t been regular for at least two years won’t be counted by a lender, but if you will continue to receive them, make a note of it for future reference, as it may increase your comfort level. Consider, too, if a non-working spouse will be able to get a job.
    • Next, calculate the total of your obligatory debt payments, like car and student loan payments. If you are unclear about the exact numbers, check your bank statements and get a credit report so you can use the same monthly payment numbers that your lender will. It’s a good idea to check your credit anyway, and you’re entitled to a free annual credit report from each of the major credit reporting agencies (Experian, Equifax and TransUnion).
    • Finally, examine what you are now paying for housing. Take a look at your current rent or mortgage payment, plus taxes and insurance, to get an idea of what you can handle going forward.

    Now you can calculate your own ratios. Here’s an example using simple numbers for ease of calculation:

    Say your rent is $1,000 per month and your gross income is $3,000 per month. Your housing expense ratio is $1,000/$3,000 = 0.33 (33%).

    Next add your other expenses, say $300 per month. The total expense is then $1,300 and your total expense ratio is $1,300/$3,000 = 0.43 (43%).

    A lender would say that your ratios are “33 over 43.” Note that these ratios are higher than the traditional 28 over 36, but your mortgage might still get approved.

    Now think about how comfortable you are at this level. Perhaps you are single or have no kids and you are able to save money every month. There’s still some room in the budget even though the ratios are a little high. Other borrowers with the same numbers but with two children might feel stressed on this budget.

    To learn more about buying a home and how the financing process works, read more from our experts by visiting our Mortgage Learning Center.

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      • Gerri Detweiler

        The median household income in the US is about $53,000, though, so $4000 a month is not too far off that (and an easier number to use for illustration purposes).

      • Gerri Detweiler

        It sounds like a horrible situation. Affordable housing is definitely a serious problem for many people. Have you looked into something like Habitat for Humanity?

      • Jenny Gershwin

        Consider going back to school to obtain a skill. $740 a month is bare minimum and there is no reason to be stuck in this wage range unless you have some medical reason that you cannot work. There are many skills that can be obtained in less than two years, some in months that could easily double your income. The answer is not a government program but rather personal responsibility. You can do it!

        • NEWS2VIEW

          Reality check here:

          At that income, she can’t afford to return to school unless her state has a good public education system, and the fed still offers Pell grants that cover pretty much 100 percent of tuition. Understand that books alone for one semester will set her back enough that she won’t be able to eat beans on that income! Once she begins to borrow to finance an education, her chance of owning a home will be even further reduced.

          Even a private career college for pharmacy tech, nursing aide and such is more likely to do more harm than good at that income level. Relative to the ~$60K+ students can expect to pay for a fast-track career school and the ~$12 per hour new grads can expect to make just starting out, you do the math. Student loans of ANY kind will gobble up her monthly take home for years, leaving her right back where she started — too poor to qualify for a home loan. (Notably, too, student loans aren’t dischargeable in bankruptcy so you better be 200 percent sure there is a job waiting for you with what skills you acquire.)

          Finally, you have to consider that depending on where this individual lives there may not be decent job opportunities. Moving away for a better job takes money for relocation, but unless a head hunter is after you it is uncommon for anyone to foot the bill for you to relocate to their town/state, either.

          In my view, we here in the United States have developed a distorted romanticism that somehow poor people just have to be of good intention and the rest of it will work itself out. Except that the reason so many Americans rose out of poverty in generations past is not by chance but because public education was low cost (if not free) to those seeking a higher education, and jobs existed for blue collar and professional classes alike. Technology and globalization, combined with cuts to programs that serve to help people improve “social mobility”, have made the United States sink behind the UK and much of Western Europe in more recent times. It is more likely that a person born into a poor family in the UK, Germany or the like will be able to achieve a middle class life than a person born into the United States today.

          Once we can get past the political divide that has everybody looking for scapegoats, we can begin to help decent people who want to do right by life. Instead, there are people in media egging on the blame game, unappreciative of how much the game has changed even compared to starting off one’s career in the 1970s. Let’s hope Alexandra’s grandchildren inherit a more compassionate, pragmatic future — not the partisan hatred that passes for intelligent thought today.

          We Americans have been taking aim at each other for so long now, the divide between rich and poor is on unparalleled ground, historically. The mechanism by which that divide remains firmly in place is by the widespread but relatively modern assumption that anyone and everyone who lives in the type of place Alexandra describes must be a deadbeat drug addict and therefore is getting their just deserts. The modern doctrine of “tough love” calls for us to allow America’s poor to fall on their presumably lazy **sses as many times as it takes. And yet the price for this blanket approach is failure to appreciate just how many undeserving, otherwise intelligent people are getting dragged down through no fault of their own.

          The massive influx of illegal drugs of all kinds, which really became a huge problem in the ’80s, has all but erased the compassion Americans once had for their down-and-out neighbors. This, along with the decline in religious affiliation — that God looks kindly upon those who help the poor — has accelerated the ease with which people turn a blind eye. The assumption now is, America’s poor are too dumb, too lazy or too busy scoring drugs to care so why should anyone else?

          That, in a nutshell, is why we can’t build a better society — we assume that everyone is in such situations with good cause. Except it couldn’t be further from the truth. Job-displacing technologies, failing public education and globalization itself have placed more and more otherwise capable Americans behind a wall of financial shame. We’re not doing a thing about it, by in large, because we’ve relegated these people to sleazy addicts and lazy moochers. The will to do something about poverty was much stronger in this country before illegal drugs became so rampant. The street drug era has given rise to stereotypes that allow policymakers and media pundits alike to write America’s poor off, with little differentiation or thought given to those who don’t do drugs and don’t want to throw away their lives at all.

      • NEWS2VIEW

        In ghastly overpriced California, $688 won’t even rent you a room,

      • RaeC

        I hate to interfere here, but you do not know her situation and therefore do not know if her dogs are needed or not. I have two large dogs. One is my son’s dog. He has Asperger’s Syndrome and he is diabetic. The other is my dog. I fractured my back and have other disabilities. NOW, looking at her income, it is my guess, she is receiving SSI from the number she gave and may have those animals because of that reason.
        I too, once had my own business. A few cars and I am still quite known in the area for the detailing I did on vehicles, fracturing my back put a damper on my business and my life. So do not preach to me. I did have it all, and an accident took it all away.
        So, please think wisely before you type or speak. You may have lived on less, but you did not walk in the same shoes. Congratulations to you on having a condo, a beautiful wife and a business, my only hope is that you can keep them, since you do not seem to think before you speak.

      • Anonym00s3

        I thought only Vladimir Putin had a troll factory for astroturfing.

        And yet there’s always someone in any thread about money in the United States that has to claim they *understand* your poverty but the magic of *hard work* and *decisions* miraculously made them rich and successful. Don’t despair friends! The American Dream is alive and well because someone on the Internet said it happened to them!

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