Mortgage Payments Shouldn't Exceed 28% Of Your Income

Those with option-ARM mortgages ratcheting up to a higher APR in October, take note: A well-polished piece of advice for home owners is that mortgage payments, including principal, interest, insurance, and taxes, should not be more than 28 percent of your gross monthly income, according to the August issue of the USAA member magazine. Individual situations may vary, but the basic idea is not get more house than you can afford. Around 28% gives you enough to take care of day-to-day living expenses and food and gas and going to see Transformers and whatnot.

(Photo: Sam Wilkinson)

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  1. choinski says:

    The only flaw I see in this logic is that it assumes 72% is required for everything else: Food, clothing, transport, utilities, savings & investment. If, for example, these needs can be adequately covered by 55% of your income, why not spend more on a better living space?

  2. Murraythedog says:

    It’s a great theory, but totally untenable if you live in one of those blisteringly expensive (even now) housing markets. My husband and I make pretty good money, have a fantastic credit rating, and our mortgage (on a 2 BR condo) is still running about 35% of our income. We still don’t feel really pinched by it, and our mortgage is fixed rate, but there is no way we could afford housing in our area if we limited it to 28% and not a penny more. I start to hyperventilate when I think about wanting a single family house and a kid some day. Let’s hope my biological clock can wait out the housing market.

  3. Crazytree says:

    28% gross or net?
    fully amortized, interest-only or neg am loans?

  4. Phuturephunk says:

    MURRAYTHEDOG:

    Your biological clock better have another 10 years on it. That’s about the time its going to take for it to really correct. Unfortunately the interest rates are going to murder the deals to be had on depreciated prices.

  5. Falconfire says:

    thats great… time to tell people that they have to stop raising the price of areas well beyond the mean income of said area…

    what do you mean they arnt listening and are just standing there laughing at you?

  6. pinkbunnyslippers says:

    Yeah well I want to be a size 2 and a natural blonde. Sometimes things don’t happen the way we want them to.

    My mortgage/taxes etc. is about 35% of my monthly gross income, and that’s pretty typical for my area. And I’m not making paupers wages, living in a McMansion either…

    I’m glad they indicated that “individual situations may very”. Why don’t they just say “if you live in NY, SoCal, DC, Silicon Valley, or Miami, you’re exempt from any real estate “rules” that exist”?

  7. Nemesis_Enforcer says:

    LOL I spend more than that on my freakin apartment rent, here in L.A…. If I got a house I would be eating balogna and PBJ everyday.

  8. enm4r says:

    *Urban residents need not apply.

    As stated above, and will probably stated again numerous times, in urban areas this just isn’t possible. My rent/basic utitilies breaks their rule, and if I were to ever consider buying I’d easily be looking at 35-38%. This theory is about 10 years out of date, and is exponentially more out of date every year.

  9. Anitra says:

    @pinkbunnyslippers: Add most of Massachusetts to that list, and I’d say you are on the money.

  10. Snakeophelia says:

    We live on 10% of our gross monthly income. We rule!

    Of course, we also live in a place that is sketchy enough to require a Town Watch, a “fight court” for juveniles, a dedicated narcotics squad, and a watchful police force. But hey, you can’t have everything.

  11. slowinthefastlane says:

    I disagree – it really depends on what your monthly income is. If you pull down $1000/month, then sure 28% (or less) makes sense. You would have $720/month left over for expenses and savings. However, if you make $10,000/month, you could easily go up to 50% if you wanted to, as even then you would have $5000/month leftover.

  12. bnet41 says:

    This depends a lot on the area. In a place like NYC some people are at or over 50%. I don’t know how you would achieve 28% here.

  13. not_seth_brundle says:

    @slowinthefastlane: I totally agree. I have never understood the percentage guideline as someone who makes more money doesn’t necessarily need to spend more on groceries and other basic living expenses. The percentage is meaningless; instead, everyone should run the numbers and figure out how much they need (outside of housing costs) to live on, figure in a cushion for emergencies, savings, debt repayment, etc., and then allocate the rest to housing.

  14. AndyDuncan says:

    In LA right now I would have to spend over 60% of my gross to get a house in the ghetto. And I make decent money. It’s the land of the two-income shack down here.

  15. dieman says:

    Ironically, you might just not want to use USAA for your home loan, as they just outsource it to Cendant anyhow. If you’re going to just get shoved off to a large megacorp, might as well choose your megacorp on your own.

  16. jfgaczewski says:

    I always understood the rule to be 28% for your home and 36% for your overall debt (e.g., student loans, credit cards, cell phone, car, etc.). Thus, if you live in a place like NYC where you don’t own a car, couldn’t you have a higher home percentage, such as 32%? But, yes, as most people suggested, 28% may be ideal, but it’s very tough to buy anything on that, unless you’re making sick coin.

  17. balthisar says:

    Before the boom — back when I got my mortgage on my first house — part of the qualification was that you were only eligible for the mortgage if the end payment was maximum 28% or your gross income — or 32%, or as high as 34%, depending on the bank. That was pretty much it. A quick calculation remembering what I made back then puts me right at just over 28%. Of course the boom happened driving up all the values, so I can that in lots of areas, that rule is probably unreasonable today. On the other hand, here in Michigan, it’s probably becoming achievable again due to all of the houses and movers out-of-state.

    Let’s see, I bought my current house at the tail end of the boom, and I come in at… well, just under 25%! That’s actually good news! Of course my income has gone up almost 350% since then (1998), so that probably has more to do with it. If I’d waited to buy my house now, I’m sure that percentage would be even less.

  18. Elijah-M says:

    If you’ve got a fixed rate, your mortgage payment is going to stay the same, while your salary is most likely going to increase. Toughing it out and living on the cheap for several years pays off when your mortgage-to-salary ratio becomes roughly half of what it was when you purchased your house. This is one reason people who have owned their homes for ten years or longer typically have more liquid assets than renters.

  19. burbed says:

    This is terrible advice. Everyone knows that debt=wealth and that you can always refi your way out of trouble. It’s almost as basic as “housing always goes up”.

    You’re not a player unless you’re spending at least 40% of your income on mortgagea lone.

    Here are some great places to move to so that you can play the game:

    [www.housingtracker.net]

  20. burbed says:

    @Elijah-M: This is one reason people who have owned their homes for ten years or longer typically have more liquid assets than renters

    That’s probably for boring places. In exciting places 28% of loans are negative amortization. I think you’re forgetting a fundamental fact of Housing 3.0 – Debt = Wealth

  21. AcidReign says:

        It says in the fine print that it’s based on gross income. Typically, a first-time home buyer can’t do that. You buy while you can get your credit stars aligned, hold on through those lean years, and hopefully in the future you’ll make more money, and things will ease.

        This is the tried and true formula of the past century for home-buying. I nearly bankrupted myself buying a home 15 years ago, but I held on. Luckily, I did know to get a fixed rate. Now, that once-daunting payment is only 16% of my gross pay. It would be a lot lower, but property taxes have more than tripled in 15 years.

  22. samurailynn says:

    I guess I’m lucky then. We’re looking at buying our first house and we’ll most likely have a payment at around 25% or our gross income. We also have pretty much no other debt, so even better!

  23. @Murraythedog: 35% really isn’t drastic — or not drastically more than 28%. I think they’re more aiming at folks spending 50% of their paycheck on a huge mortgage and who have no furniture because they can’t afford to buy any.

    @not_seth_brundle: “someone who makes more money doesn’t necessarily need to spend more on groceries and other basic living expenses.”

    The trouble is that most people who live in wealthy areas have “need creep” … they want better cars, better clothes, private school tuition, etc., so their “basic living expenses” tend to go up to keep up with the Joneses.

    As long as you’re capable of figuring your basic living expenses and fighting need creep, finding your “flat number” for your mortgage rather than the percent would work fine. But if you’re prone to need creep and don’t track expenses, the percent guideline is probably safer.

    Side note, we live in a middle-class/mixed-class neighborhood, and we live a LOT CHEAPER than our friends who live in upper-middle-class enclaves, and not just because our mortgage is cheaper. Our Joneses are a lot easier to keep up with than their Joneses! (on the flip side, the public schools are crap.)

  24. zolielo says:

    HUD states 30 to 40% of gross. Above 40% and investment, savings, and safety stock could be under funded.

  25. floofy says:

    Damn, and I thought 26% of gross was high! I can’t imagine how people are doing it on 35-40%. I figured mine to be about 16.6% gross-which includes mortgage, insurance, and property taxes. I live in a nicely remodeled 3 bedroom house, and have a decent savings account. Guess I should count my blessings.

  26. angelfast says:

    I get the logic of this…So, time to educate people to be more careful on their expenses and regulate their cost of living…That’s why I’m cutting my expenses with my car’s budget.I just replace what’s necessary or badly needed like my Lexus muffler

  27. CumaeanSibyl says:

    I think the point is that it’s a good idea not to have debts that require a significant portion of your income to pay back, because it can be hard to get out of a debt that size.

    Also: 21%. Haha.

  28. ironchef says:

    @choinski:

    one word…taxes.

  29. Dibbler says:

    Mine is at 13% and I’m thinking that I need to get a more expensive house. I have friends that have huge payments but seem to always have money and I think it’s because they get such a tax break from the house interest. These guys are single and claiming 6 dependents on their W-2′s and still getting a huge chunk back from the feds at tax time.

  30. mschlock says:

    When I bought my place the costs of mortgage + second mortgage + property taxes + HOA dues was sitting at about about 41% of my income; however, I didn’t have any other debt. Now, about 4.5 years later, I’ve paid off my second mortgage, my first mortgage is still on a 30-year fixed rate, and I’ve gotten several raises, which actually puts me at that elusive 28%. I don’t spend a lot, so I feel relatively flush with cash at 28%.

    Lesson: To properly own a house, always get lots of raises. Whee.

  31. anatak says:

    @Dibbler: The tax break/mortgage interest thing doesn’t work out that way. “seem to always have money”, huh? By chance is their last name ‘Jones’?

  32. anatak says:

    @Dibbler: Oh! And getting a huge chunk of money in a tax return means that they gave the gov’t an interest free loan for last year. Also, not a good thing

  33. kimmie says:

    That doesn’t work out so well if you live in the San Francisco Bay Area. Even renting a shoebox here sucks half your income. Burbed linked this article yesterday: [www.burbed.com]