My new favorite pastime is searching MLS listings for houses. Who needs baseball when you can drool over houses you can’t afford? Or can I?
I’m also reading Automatic Millionaire Homeowner by David Bach (free review copy, will give it away when I’m done). Inside it refers to the FHA guidelines for how much of your income should go towards your house payments. Specifically, lenders use a term called PITI – the sum of your mortgage principal, interest, (property) taxes, and insurance payments. To get an FHA-insured mortgage, your monthly PITI should be between 29% and 41% of your gross monthly income, depending on your other recurring debt such as credit cards or student loans. Let’s take a look at what that means:
|Annual Gross Income||29%||41%|
Of course, the resulting loan amount you can get using these amounts depends on the mortgage rate you get. Also, it should be noted that these FHA numbers are pretty generous. Instead of the 29/41 numbers, conventional (non-FHA) mortgages may have lender ratios of around 28/36.
We have no student loans, car loans, or credit card debt (at least by the time I apply for mortgages), and my first reaction at looking at 41% of gross income that it is a pretty hefty amount. Should I really pay that much?
But then my second reaction is even with that big ratio, we can still barely afford anything! Therefore, maybe these high ratios could work in certain areas where housing is simply a huge chunk of living expenses. I mean even now, more than half our monthly expenditures go towards rent. Food and utility expenses don’t vary nearly as much across the country as housing prices.
What do you think? For the homeowners out there, what’s your PITI/income ratio? (Added: location would be helpful too)