28% of gross income for PITI (principal, interest, tax, insurance). 33% of gross for all debt payments (student loans, credit card, auto loans). Plan on spending more on repairs and improvements. After we bought our first house, we were dismayed that at the first rain our roof leaked in many places. The home inspector had not gone up on the roof (and I found out later that home inspectors are notoriously lazy about getting into attics, crawls spaces, and up on roofs). We had barely scraped together the down payment for the house, so we had no money for the roof, and had to borrow against our 401(k).
Lenders will let people spend much more than 28% though. I think lending has become so lax, you can spend 50% on PITI, or they will do 33% PI and not include the TI. But if you spend more than 28% of your income on housing, how will you afford the repairs, any emergencies, retirement saving? I think that’s why the debt ratio has gone up so much. The largest expense that people have is their mortgage, and if you can just keep your mortgage low, you have so much money left over for other investments.
I read a book about a family in Iowa living on $18K/year for a family of four. They can manage because they live in a very simple small home. They reduced the largest expense, the mortgage, to about $500/month. I think that’s very smart. Personally, I don’t see the point of spending a large percentage of income on a house. Financial independence is achieved by spending less than one earns, and investing the difference.
