This rule states you shouldn’t spend more than 28% of your gross income (what you take home before taxes) on your mortgage payment (principal and interest only). The 28% number is also called the front-end ratio.
Example: If your household gross monthly income is $10,000, then you can afford to spend around $2,800 on your mortgage principal and interest per month. (10,000 * .28 = 2,800)
Coach’s Note: I feel the 28% rule is a rule of dumb. As a past mortgage lender and a financial coach, I have seen countless clients over-extend themselves because they don’t #knowyournumbers.
Hear me out, this doesn’t take into consideration any other large monthly payments you might have. For example, I’m currently paying $2,300 in child care monthly and $1,200 for self-employed medical insurance.
The Math (based on our example above):
$10,000 (gross income) – $2,800 (mortgage) – $2,300 (child care) – $1,200 (insurance) = Remaining $3,700 😵💫
The list of monthly expenses go on and on.
You should look at those and any other significant debt payments you have. You must understand your cash flow and the actual payment amount you can afford.
Bottom line: Just because your lender says, you can afford a $450,000 home doesn’t mean you should. P.S. The bigger the home and loan, the bigger the commission a realtor or mortgage lender will make.