home ownership

Deciding What Percentage of Income Our Mortgage Should Be

Boy, am I happy my husband I have been saving and saving for our future first home and haven’t jumped in before we were ready.  I read an article yesterday that made me a little uneasy about getting ready to sign on for my first mortgage:

“…68% of homeowners say if they lost their jobs, they wouldn’t be able to make mortgage payments for more than nine months, and many would fall by the wayside before that.”

I was actually pretty surprised that two-thirds of home owners could pay their mortgage for that long after losing their job – major props to E-funds!

But it did get me to thinking about our future home.  There’s that whole thing about putting 20% down, but then there’s the issue of what you’re left with in terms of a monthly mortgage payment.  We’ll definitely meet the 20% requirement, but now I’ve started to think about other percentages: how much of our income do we want to devote to our mortgage every month?

Here are some some bits of advice I’ve seen:

  • Limit your monthly payment to 25% or less of your monthly take-home pay [Dave Ramsey]
  • Your mortgage should not be more than 28% of your income. [Investopedia]
  • You can afford to mortgage a property that is 2 to 2.5 times your annual income. [various people and places]

Now, I’m a big Dave Ramsey fan, and so is my husband, so we generally try to follow his advice.  I like his 25% rule and our big goal is to meet these qualifications and we probably will.  But … that’s with two incomes.  What if some day one of us loses our job or one of us decides to stay home when we have kids?  I think things would be tight and would leave very little wiggle room for emergencies.

Surviving on one income is a very real possibility someday, too.  So, we have to consider these things.  If we find a house at the low-end of our price range, it would make things much, much easier.  But, I get a home listings e-mail every day and every single home that we’re interested in is in the mid- to upper-end of our price range.  (Of course.)

Decisions, decisions.  The only thing we can do right now is to continue to save our little tails off.  Which we are.  And we will.

What are your thoughts on how much you should commit to for a mortgage payment?  What do you think of the 25% rule?

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B&B

We cover all sorts of topics here at B&B: health, career, happiness, improvement & goals, order & productivity, and of course personal finance. Thanks for reading!

16 Comments

  • Hi Amber,

    Great post and one I have been pondering while saving for a house.

    The question of how much *can* you borrow versus how much *should* you borrow is an interesting one.

    As it turns out, I bought a home last week. It is a trendy inner city suburb close to the University that I work at here in Australia. I’m in my early 30s and I moved home to live with my parents for 3 years and saved and saved and saved.

    My mortgage repayments will be 58% of my take home pay. I earn a decent salary, so I think there is a reasonable amount of money left over for me to meet my usual expenses and to have money left over for extra mortgage repayments, going out, holidays and other savings.

    These are a few reasons why Dave Ramsey’s formula doesn’t work for me.

    – I live in Australia and the city I live in has some of the most expensive house prices in the world. If I were to stick to the 25% rule I would be travelling over an hour to an hour and a half a day to get to work. I would rather pay extra for a mortgage, live in a desirable area and have a better quality of life.
    – I saved a 15% deposit plus stamp duty. In Australia, we also have to pay stamp duty, which is a one off cost – in my case, I’ll have to pay $26,000 to the government when I settle on my home. Getting to 20% plus stamp duty in a rising real estate market is a really tough ask.
    – I have a secure job. My employer also pays a generous sick leave (50 days off per year) so I think if any major calamity occurs I will be ok. I also intend to take out income protection insurance, to kick in once my sick leave is exhausted.
    – If I do have a baby my employer has a generous maternity leave scheme which pays 70% of my salary for a year. By then I would hopefully have a partner who could help out
    – I’m going to get a flatmate in to help pay the mortgage for the first year, and by then my salary should have gone up to the point where I am more comfortable in the repayments
    – I am going to aggressively pay off my mortgage.

    I think there is a sense that your first property can be a ‘reach property’ – that is you stretch yourself a little bit, particularly if it is likely that your income will go up in the future.

    Anyways, food for thought!!

  • It’s definitely a concern for me. We’re probably another 10 years away from homebuying, and my plan is to buy our house for life. But that also means we’re likely to have kids pretty soon after buying, and it’s highly likely that will mean not having two fulltime incomes for some time…

    • Not crazy! I’m in the same position as you. There’s a reason why I set my down payment goal so high – to delay when I start thinking about it since I am so not psychologically ready. I see buying a house as needing to stay in one place for 5 years, but by the time I have that $ amount saved up, I’ll have been here for almost 5 years and would I really want to stay here for another 5 years?

      My rent is currently about 17% of my net pay, so I would prefer to keep my mortgage payments to a max of 20% of my net pay and then pre-pay as I can.

  • I think staying within the 28% rule is safe. It also depends on the cost of real estate in your area. If you make, say, a combined salary of $150K in San Francisco, it’d be virtually impossible for you to buy a single family home that is within 4x of your income in the city. If you make the same amount in Minneapolis, I imagine you can find something nice for within 2x your income. So I don’t dispute that if you are set to own in some areas, you will have to “stretch” more than what is commonly recommended and cut back in other areas. If I’m not mistaken, you live in a fairly reasonable area, so I think you guys will be fine.

  • 23, married, no kids, no debt. We are renting and will be saving for a few more years before we buy a house, but once we have kids (in a few years) I am going to quit my job. Depending on my husband’s income when the time comes, we could follow the 30% rule for a 30-year mortgage, but we really want to do a 15 year mortgage. Are you doing 15 or 30?

  • The starting amount of our mortgage was about twice what we make annually. We refinanced to a 15 year mortgage and now it accounts for about 25% of our takehome pay. I was unemployed for 4 months at the beginning of this year but was able to collect unemployment so we still make it work, though we had to be more thrify than usual.

  • The 25% thing makes no sense for moderately high wage earners. If you are making say…150-200K/year, but otherwise have “normal” expenses – ie you don’t eat out for $400/person, or take crazy vacations, or maintain a vacation home etc etc etc. Take home pay would be anywhere from 9-13k/month – limiting yourself to only 25% of that for housing is silly. But you have to make intelligent choices – ie spend 10K on awesome vacations a couple of times /year, or live in a really nice house/condo. My combined mortgage/taxes/insurance (and I pay PMI) comes to roughly 58% of my take home pay as well. I still have lots of toys, go on vacations, and support a gf that is in law school (granted she’s taking loans out to pay for it – but I pay most of the living expenses). It was a choice…and it definitely makes unemployment scarier than if it were a smaller number, other than that – similar to australia above, I’d not be able to live in anywhere near as nice a house and/or be even further away from NYC.

  • I still am amazed at the focus on mortgage costs for people planning to have kids. For instance, the expected costs for our 2-year-old going to college (4 yrs, in-state, including housing) is $357,000 for our state. That is going to be more than we pay over the course of our 30-year mortgage (house+interest), but that money needs to be there in under 16 years. Ack!

    We’ll need to save over $1048 a month to pay for her college. I understand college isn’t a “necessity”, but I would argue a bachelors degree is the “new” high-school diploma. That is essentially the cost of our mortgage on our modest, 60-year-old house. I can’t imagine having a second child and even thinking about paying for his/her college! After one kid, the mortgage becomes essentially a minor expense compared to college costs (and not even thinking about paying for those 18 years of raising the child).

    • Well…you don’t really need to save 1048 a month, you are looking at a worst case here. First off you have the 3 subsequent years of college too – so really it’s a 19 year timeframe. Also I assume your estimate there is the full cost. Hopefully you’ll have some sort of assistance. Even if not…you still wouldn’t really need to save that money all up front…you could take some loans out and extend the timeline further…

      • Yes, I’m planning for worst case scenario here, since I won’t realistically be able to cover costs anyway. It’s easier for me to target saving $1048 (which is the worst-case scenario) and then only be able to do a portion of that (which is the likely scenario).

        Unfortunately it is extremely difficult for anyone to accurately predict the costs, since tuition costs are rising more and more each year (usually around 7%, but a 17% increase was announced for one program this fall). Also, I find it hard to predict what kind of returns I’ll get on my 529 account, considering they are not earning anywhere near the 7% most calculators assume they’ll return.

        The one advantage to a mortgage is that I know the terms exactly. 30 years, 4.00% interest and then we’re done. Naturally we can’t infallibly predict the tax rates, repairs, insurance costs, etc, but those haven’t been bubbling out of control like education costs. I don’t even want to think about the numbers “required” for retirement…

        • I am on the other side of the mountain. Married 23 years with three kids, two are in college now. We didn’t save a dime because my wife stayed home to raise them and it’s hard to make it on a single income and have a meaning college fund. My works now and here is how we are paying for school (as much as we can).

          We claim 0 on our taxes and get back about $10,000 each year. Our after tax bonus comes to about $5,000. We then take out a one-year 401(k) loan for $10,000. That gives us $25,000 a year to contribute to their tuition. That means the first two get two years covered and two years 50% covered, so they graduate with loans each of about $25,000. The third will go in after the others and that will be easy.

  • I like the 25% of your take-home pay guideline, but realistically, it also depends on where you live. I’m in the NYC metro area, and the cost of homes around here sounds insane compared to other parts of the country. While we were able to find a home with a mortgage that takes up 28% of our take-home pay (after putting 20% down), the real trouble is that our monthly property tax payment is 50% of what the mortgage alone costs us (so 1/3 of our total mortgage payment is to pay our property taxes)! And the price of our home was in the lower range for our area. We didn’t want a fixer-upper, but we didn’t want to blow our money on a fully updated home, either.

    As for paying the mortgage if one of us loses our job? We could ONLY make the total mortgage payment for 8 months. And we have a pretty good E-fund, total-wise. But we couldn’t live or pay bills. So I suppose it’s more like a 4-5 month E-fund, which we’re currently beefing up further.

  • I know for us, we ended up choosing to purchase a townhome because we have no intention of starting a family for the next ~4-5 years and if we did, we would still have enough space here to raise an infant/toddler. I wish I had some insight on what the best “rule” to utilize would be, but at the end of the day it all comes down to figuring out what situation allows you two to feel the most secure. Good luck!

  • Your guidelines are prudent, and there is nothing wrong with planning for the worst, but when contemplating a home purchase it has to be more than financial. You are wise to consider the future and kids, but big bedrooms and large homes (teh ones with nig mortgages to match) spread everyone out and encourage time alone? School districts are important, neighborhoods, and nearby ammenities like proximity to your hospital, etc. If you are this nervous about the financial side of homeownership it may be put to rest with as much effort being spent on figuring out all the other stuff first? It might be a lot of worry for nothing.

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