As a financial advisor with extensive experience in real estate and personal finance, I understand that determining the right amount to spend on a house is a crucial decision that can significantly impact your financial future. The 28% rule, also known as the "front-end ratio," is a guideline that many lenders and financial advisors use to determine how much of your income should go towards housing costs. This includes not only your mortgage payment but also property taxes, insurance, and any homeowner association fees.

The 28% rule is based on the principle that your housing costs should not consume a disproportionate share of your income, leaving you with enough to cover other expenses and save for the future. Here's a breakdown of how this rule can be applied:


1. Calculate Your Monthly Gross Income: This is your total income before taxes and other deductions. If you earn a salary, this is typically your annual salary divided by 12. If you're self-employed or have variable income, calculating your monthly gross income might require averaging your earnings over the past year.


2. Apply the 28% Rule: Multiply your monthly gross income by 28%. This will give you the maximum amount you should spend on housing costs each month.


3. Consider Other Debts: It's also important to consider your debt-to-income ratio, which is the percentage of your income that goes towards paying off debts. Lenders typically prefer a debt-to-income ratio of 36% or lower, which includes your housing costs and other debts like credit cards and car loans.


4. Factor in Other Expenses: Remember that housing is not your only expense. You'll need to account for groceries, utilities, transportation, healthcare, and savings. Make sure that your housing costs leave you with enough income to cover these essentials.


5. Long-Term Financial Goals: Consider your long-term financial goals, such as retirement savings, education funds for children, or paying off student loans. Spending too much on housing can hinder your ability to achieve these goals.


6. Emergency Fund: It's wise to have an emergency fund that can cover at least 3 to 6 months of living expenses. This fund should be separate from your housing budget and is crucial for financial stability.

7.
Home Affordability Calculators: Use online home affordability calculators to get a better idea of what you can afford. These tools take into account your income, debts, and other factors to provide a more personalized estimate.

8.
Consult a Professional: Before making a decision, it's always a good idea to consult with a financial advisor or mortgage professional. They can provide personalized advice based on your unique financial situation.

9.
Adjust for Local Market Conditions: Housing costs can vary greatly depending on the location. Be sure to adjust your budget according to the local market conditions and the cost of living in the area where you plan to buy.

10.
Lifestyle Considerations: Finally, consider your lifestyle and how it may change in the future. If you plan on starting a family or if your job situation might change, these factors can influence how much you should spend on a home.

By following these steps and keeping the 28% rule in mind, you can make an informed decision about how much to spend on a house based on your income. It's important to strike a balance between affordability and quality of life, ensuring that your housing costs do not prevent you from achieving your financial and personal goals.

read more >>

We calculated how the 28% rule works out for various incomes. If you have one of the incomes below, here's the maximum you should spend. It says your total: Monthly housing costs, which include mortgage payments, insurance, property taxes and condo or association fees, shouldn't exceed 28% of your monthly gross income.Mar 28, 2018read more >>