#4: Paying for a Home

This is part of a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

How Much Should My House Payment Be?

Rule #4: Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.

This is an unsurprising rule that is basically just a statement of the basic rule of thumb most lenders used when deciding on a home loan and is just a rewrite of

yesterday’s nearly-identical bromide. But the fact is that this rule isn’t really hard and fast, either.

In fact, for most people 28% is beyond what they should realistically budget for while allowing themselves any room whatsoever to breathe. If you spend 28% on your mortgage payment alone, you’ve committed nearly 40% of your gross wages to your house payments, your property taxes, your insurance, and necessary upkeep, which puts many people on a path where they simply cannot afford to save any money whatsoever, since other taxes will claim another 25%, leaving you about 35% of your income to live on.

Here’s a better rule: figure this number in terms of your net income. This way, you can calculate how it will directly affect your monthly take-home after you’ve removed items such as your income tax withholdings and your retirement payments, which you should never touch just to buy a home. Figuring that you’re working with 28% of your gross income, let’s assume that you can potentially spend 35% of your net income on housing. Since you should be contributing, at a bare minimum, 5% of your net income into some sort of savings or investment in the event of the loss of your employment, this leaves 30% of your take-home pay that you can spend on housing. You can do a similar calculation and quickly determine that your total debt repayment shouldn’t exceed 40% of your net income. So let’s rewrite the rule:

Rewritten Rule #4: Your total housing payment should not exceed 30% of your net income. Total debt payments should not exceed 40% of your net income.

You can

jump ahead to rule #5 or

jump back to rule #3.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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