While there are always exceptions, it’s typical for mortgage lenders to mandate that your sum total of debt does not surpass 36% of your gross income. The calculation of this debt encompasses:
Expenses Associated with Housing
The costs associated with maintaining your home—such as your mortgage repayment, homeowner’s insurance, and property taxes—are all included in this category. If you’ve made a down payment less than 20% of the purchase value, remember to take into account the expense of private mortgage insurance.
Existing Financial Commitments
This covers all other monthly financial responsibilities not tied to housing, including items such as credit card payments, car loans, child support and alimony, along with student loans. Some individuals choose to incorporate extra expenses like childcare, healthcare, school fees, and retirement savings, although this isn’t mandatory.
To calculate your monthly housing allowance:
- Multiply your gross income by 0.36; this gives you your maximum permissible debt.
- Sum up all your existing financial obligations.
- Subtract the value from step (2) from the value in step (1).
The end result is the maximum monthly housing expenditure you can manage, given a 36% debt-to-income ratio.
It’s worth noting that certain lenders may be open to pushing this figure to 40% or even higher. However, bear in mind that any increase in debt obligation enhances your financial vulnerability should there be a dip in your income down the line.