Rule Of Thumb For Mortgage

Use all four you listed and create a football field of reasonable estimates.

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4x Yearly Salary

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This does not sound like a good one at all. I think it could apply to lower incomes, but someone making $250k has no business buying a million dollar home.

Use 1 or be house poor. My monthly payment is 15% my net and any higher would hurt my every day lifestyle. But then again I enjoy 3-4 vocations a year, eat out 3ish times a year. Season tickets to LSU football and basketball.

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eat out 3ish times a year

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Ok mr moneybags

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Household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service

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Probably a good thing to do the math on at least.

But if you are actually making a budget and sticking to it you can work from there.

I don’t understand the idea of figuring out what your max mortgage should be. I would think about this as what is the best deal you can get for what you need. How big a house do you need? How many kids determines things like minimum bathrooms and bedrooms needed. Once you figure out what you need I would try to find a house that meets your needs for no more than $150 a square foot and closer to $100 is better. This number definitely should not be more than 25% of net but lower is much better. Being house poor sucks and makes you financially vulnerable to any disruption of income. You should be saving 25% of net income, not spending it on housing.

I make good money and bought my primary home for less than what I make a year. I bought my first home for a little less than twice my yearly income at that time. Spending 4 times my income on a home seems insane to me and you definitely will not be able to save significantly.

My rule was always a (very) conservative 2X my gross annual salary (excl bonuses).

In the end it's simply about seeing what cash flow monthly you need and getting to that number (or frankly better than that number) adding in a mortgage/escrow/hoa etc...

Why the gross income rule (Even with the debt adder) cant necessarily work is some people save way more than others.

Take 2 different couples here, both make $100k combined ($50k/ea to make it simple) and looking to make first home purchase. This is $8.3k gross a month. Let's say simply after non retirement benefits at work, their net is $6k a month from that with taxes (state of GA used here)/health benefits taken out. Both couples have no other debt (ideal scenario) and spend about $3k a month on various non-household related things. So they both have about $3k after all that at this point.

Both couples have employers who match 50% up to 6% of their 401k, so they contribute 6% to get that 3% match. 1 couple stops there in terms of saving for retirement, so they now have about $2.5k leftover for household related expenses. The other couple are better retirement savers and on top of that 6% contribution to their 401k save $500/mo each to IRAs, so they have only $1.5k a month leftover for household related expenses.

So just that 1 difference there makes a pretty significant housing difference in what they can "Afford" as 1 couple can do $2.5k/mo and the other $1.5k/mo despite making the exact same amount of money.

So basically first couple could comfortably afford a much more significantly higher priced house than couple 2 due to their cash flow they have each month simply from the difference in retirement savings. In the end it's really about that monthly cash flow, realizing that, and sticking to BELOW that number in housing related expenses.

Most of the time though, it's not even the mortgage, taxes or insurance that gets people, it's the repairs/maintenance that people dont budget for in homes. Easy to sit here and figure out a mortgage/taxes/insurance for a house, not as easy to know how much money you'll need and when exactly for repairs/maintenance.

Under 25-30% of net income is a good start without any variables of other debt. To keep it simple, also not including here job security, likeliness to move or current market outlook.

Obviously there's more than one way to skin a chicken, but to me this is a good baseline to start. My wife and I are around 24% of net income towards PITI (no other debt except a few more payments on her car) currently but still put a good bit extra each month because that's what we are comfortable with and want to finish the note in under 20 years if possible for our personal peace of mind. This is also after maxing retirement and where we plan to raise our family.

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I'm comfortable with about 10% of net income including utilities, taxes, and insurance. I'd be pretty uncomfortable at 25% of net. I'm fortunate to have a pretty high household income. I'd think folks in the average earning range have to really stretch to get a decent house these days.

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This is extremely difficult to do in the lower ranges so I imagine you do well for yourself like you said.