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What percentage of my budget should the mortgage be?

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A word to the wise: The ratio that the lender will likely quote for you should be considered the MAXIMUM, not a recommendation. It is the number where they start getting nervous about getting paid back on the loan. – JohnFx May 10 '12 at 18:45

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In the old days (I am old, walked 2 miles to/from school, uphill both ways) a well-written mortgage was based on the mortgage and property tax being less than 28% of one's gross income, and total debt including these, no more than 36%. A 20% downpayment was required. I dare say that if these rules had been followed, the bubble would not have occurred, and had it still occurred it would not have been as severe.

Let's look at that 28% number. A $60K income gives you $1400/mo for the mortgage and property tax. At 5%, a $200K loan (30 yr fixed) is $1074. That leaves $326 x 12 = $3912 for taxes, more than enough in most towns.

So, in conclusion, you can get a mortgage of just over 3X your income and stay within the guidelines if you put that nice downpayment. I am a fan of only going 2X, a $135K mortgage and getting it on a 15 yr loan. You will be paying it down far faster, and not regret the decision.

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good edits, thank you, sir! – JoeTaxpayer May 10 '12 at 21:08

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