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People shouldn't get a mortgage (or anything else) that they can't afford. You want to put the burden on taxpayers because people with poor credit or finances made mistakes. How about a little personal responsibility.
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EXACTLY!
4 Different Rules of Thumb For How Much House You Can Afford » My Money Blog
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By definition, a “rule of thumb” is meant to be a greatly simplified estimate for a complicated matter. So let’s see what happens when I search for “rule of thumb” + “how much house can I afford” on the internet:
Northwest Community Credit Union says 1.5 times your gross annual income:
If you and your spouse have a total income of $50,000 the general rule would be that you shouldn’t borrow more than $75,000 for your home.
CNN Money says 2.5 times:
The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary.
Washington Mutual Bank suggests anywhere from 3 to 5 times:
As a broad generalization, most people can afford to purchase a house worth about three times their total (gross) annual income, assuming a 20% down payment and a moderate amount of other long-term debts, such as car or student loan payments. With no other debts, you can probably afford a house worth up to four or even five times your annual income.
Hmm… So far, with an annual income of $50,000, I’ve been told I can buy a house for anywhere from $75,000 to $250,000! Instead, I decided to run some numbers for myself using values I think are reasonable with current interest rates.
Figuring My Own Rule of Thumb
Let’s take $50,000 in gross annual income. Let’s spend 30% of that income on housing. This is within most lending ratios including the government’s Fannie Mae. 30% of $50,000/12 = $4167 is $1,250 per month. Housing costs include insurance and taxes, so let’s back out $200. That leaves us with $1,050.
For a 30-year fixed mortgage with a rate of 6.25%, a monthly payment of $1,050 roughly equates to a loan amount of $170,000. If you had a 20% downpayment, that would be a $212,500 total house value. So with these numbers, that’s about 3.4-4.25 times gross annual income. Taking a very rough estimate of this to get a rule o’ thumb, you get 4 times your gross annual income.
In reality, these days it’s really not that hard to find a lender to give you a loan for 5 times your annual income. Theoretically, this means that they think that you can “afford” such an amount. Now you and I just have to decide whether we want to take it!
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How many people have OVERSPENT that 3-4 times gross annual income? Plus how many use both incomes when going for a mortgage? What happens when one loses their job? All of a sudden you can't make your mortgage payment.
We bought our house this spring based on ONE income ONLY. And even then we still have a second mortgage right now that we are paying with that income. AND we are managing to do both...it's tight but not impossible. The house we bought 6 years ago that we are still trying to sell was bought with just ONE income on the line.
Yes, we could have afforded much more but we didn't want to be HOUSE POOR. We wanted to be able to save some of our income to put in our retirement. Turns out it was a danged good thing we had...we had a 6 month stretch of NO income and had to use our savings to pay our bills. Liz
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08-09-2007, 10:14 PM
It was put together by Global Insight and National City Bank, and appears every year on CNNMoney's website.
Thanks Much
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