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I am looking to buy a house (in the US), and I'm using a bunch of online calculators to see how much house I can afford. In each calculator, there's usually a field that asks about monthly debt. What goes here? I have zero long-term debt, but I do have monthly expenses, including utilities, food, and credit card use that I pay off each month. Do I put these monthly credit card payments here? If not, how do these calculators account for monthly expenses?

Here's a screenshot from a calculator on cnn.com:

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If you have no long-term debt, you would put $0 into the monthly debt. That field is for people carrying large balances on their credit cards, that sort of thing.

Now, I can't speak to that particular site, but a general rule of thumb is 28/36. That means that you should spend no more than 28% of your gross income on all household expenses. Mortgage payments, insurance, utilities, everything. And no more than 36% of your gross income on 'total debt service'. That is, your household expenses and all other debt.

For example, if your gross income is $60,000 a year, that works out to $5000 per month. You should spend at most $1400 on your mortgage, insurance, utilities, etc. Have car payments? Well, you can afford another $400 on that, if you are carrying no other debt. Spend only $1000/month on housing? You could afford to spend more on other debt servicing.

Now, this is a rule of thumb. Some banks will give you a mortgage that is eating up more of your gross. But you'll want to be extremely careful taking on more load. My wife and I were substantially below 28%. We were comfortable, and could make an extra month's mortgage payment each year while still saving up for emergencies. But I wouldn't have wanted to go much over.

Thanks to Investopedia for the information I summarised above. You will also want to check out this article, Mortgages: How Much Can You Afford?

  • I don't understand how to apply the "36% total debt service" in the 28/36 rule. As I mentioned, I only have very short-term debt (for example, I pay off my credit card each month). Should this type of debt be applicable to the 36% limit? – stackoverflowuser2010 Apr 12 '13 at 17:41
  • Let's say you buy groceries on your credit card, in order to collect rewards. You pay this off each month. You would not include that in the 28/36 rule. It's only if you carry a balance from month to month. – ChrisInEdmonton Apr 12 '13 at 20:01
  • Starting from the gross salary is a fairly random metrics as the income tax varies significantly over time / geography... – assylias Apr 15 '13 at 23:00
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The bank/mortgage company is most interested in your monthly obligations, both existing and ones associated with the new house.

Therefore they want to know about all your outstanding loans, and any balance you carry on your credit cards.

They want to make sure that your mortgage related expenses (principal, interest, taxes and insurance) are below 28% and that the other required payments (car, school loan, credit card debt) are under 10%.

That will give you plenty of money for typical expenses (food, utilities, ...). The closer you are to those targets the less luxurious of a lifestyle you can have and still make your payments.

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Let me offer this spin - A $50,000 income divides to $4167/mo. 23% of this is $958, leaving 5% for property tax. As a mortgage payment, it will pay off a $200,733 mortgage. This is using a 30 year term at 4%. Put simply, at today's rates a bank will lend you 4 times your income for a mortgage, and with a proper downpayment, the median earner should be able to afford a median priced home.

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