Don't bite off too much house

The classic formulas for mortgage affordability could lead you to disaster. Here’s how to get a better handle on what you really can afford. Thirty years ago, first-time home buyers were often encouraged to stretch as far as they possibly could to buy a house. Back then, that advice made some sense.
Today, it can be a recipe for disaster.
A too-big house payment can, at the very least, leave you with too little money for other goals: retirement, vacations, college funds for the kids. At worst, it can leave you vulnerable to foreclosure and bankruptcy.
What's more, you can't count on your real estate agent, a mortgage loan officer, your friends and family or an Internet calculator to know what you can really afford. That's a decision you have to make yourself after reviewing your finances, your future obligations, your goals and your gut.
Yet many first-time buyers are still being pushed into mortgages that are bigger than they can handle, based on old-fashioned advice.
Here's what's changed in the 30 years (or more) since your parents bought their first house:
Inflation. Rapidly rising prices in the 1970s and early 1980s meant you could count on hefty annual raises. Today, you can't rely on double-digit income boosts to make your mortgage payment less of a burden each year.
Two-income couples. A generation ago, single-income families were more common. If the breadwinner lost a job, the other spouse could go to work to save the house. With more two-income families needing both paychecks to make the mortgage payment, there's no one on the sidelines to take up the slack -- unless you put the kids to work.
The lending industry. Thirty years ago, it was pretty tough to get a mortgage for more than you could really afford. Today, it's fairly commonplace. More lenders have loosened their criteria, knowing that the vast majority of their borrowers will do whatever it takes to pay their mortgage -- even if it means trashing the rest of their financial lives.
Retirement. A much bigger proportion of the workforce was covered by traditional, defined-benefit pensions 30 years ago -- which means they didn't have to save massive amounts of money on their own to have a decent retirement. Today, the onus is typically on you to carve enough out of your budget to fund 401(k)s and IRAs.
Let's get real So how much should you spend on a house? The traditional way to calculate that is to add up all your income and make sure that your housing expenses -- mortgage payment, homeowners insurance and property taxes -- don't exceed a certain amount of that total. The traditional limit, still used by many lenders, is 28% of gross monthly income. Some financial advisers recommend capping your outlay at 25%; others suggest stretching to 33% or more.
These limits, by the way, apply only if you don't have a lot of other debt. Most lenders don't want more than 36% of your total income to go toward mortgage and other debt payments. If your total debt would push you over that figure, most lenders will reduce the size of the mortgage for which you qualify. Here's how the varying limits translate. The figures assume you earn $45,000 a year and that you would pay $480 in homeowners insurance and $2,000 in property taxes annually. (In reality, those figures would fluctuate with the value of the home you buy.) This also assumes a 30-year loan at 5.5% interest and a big enough down payment that you'll avoid private mortgage insurance, or PMI.


How large a mortgage can $45,000 a year get you
If share of income devoted to housing is:
The monthly cash requirement is:
Less: taxes and insurance …
… leaves cash needed to pay the mortgage …
… and translates into this loan amount
25%
$938
$207
$731
$128,745
28%
$1,050
$207
$843
$148,470
31%
$1,163
$207
$956
$168,372
33%
$1,238
$207
$1,031
$181,582
*If gross income is $45,000 a year. **$480 a year for insurance, $2,000 for taxes. *** Assumes a 30-year, fixed-rate loan at 5.5% interest.
As you can see, the percentage of income used has a huge effect on how much house you can buy.
Fixing a glitch in the calculators
Most Internet mortgage calculators use the 28%-of-total-income figure. If you want to see how much mortgage you could afford under other scenarios, adjust your income by using the following multipliers:
Income converter to make online calculators work better

Income converter to make online calculators work better
Share of your income* devoted to housing:
Multiply your income by:
25%
0.9
28%
1
31%
1.11
33%
1.18
* Gross income
Then, use the calculators.
Your own math is more important The best way to figure out how much house you can afford is to do your own math.
Figure out how much money you need to contribute to various goals, such as your retirement and your kids' college educations.
Estimate how much your house is going to cost you in maintenance and repairs each year (figure about 1% to 3% of the home's total value annually, depending on its age and condition -- see "The hidden costs of homeownership" for more details). Then see how much of your remaining income is eaten up by your housing costs (including insurance and taxes), and see how you feel about that.
All that math making your head hurt? Here's the short version: You'll probably be most comfortable using the 25% lid. You may want to go even lower if:
You plan to have children. Kids can be expensive, and many couples discover they want to have the option of one partner staying home, or working part-time, once kids arrive. That's tough to do if you need every penny of both incomes to make ends meet. If you really want to be conservative, do your calculations based on the income you think you'll have post-baby.
You have an expensive hobby, like travel. Most homeowners are willing to put their wanderlust on the backburner to buy more house. If that's not you, buy less house.
Your income varies considerably. Most American workers have variable incomes, thanks to the prevalence of overtime pay and bonuses. If yours swings wildly from year to year, though, consider basing your calculations on your average earnings over several years or (even more conservative) on the minimum you expect to make.
You may think you can't possibly limit your housing expenses by that much, especially if homes cost a lot where you live. You do, in fact, have plenty of alternatives.
However, you can stretch further if:
You're absolutely debt-free. No credit card debt, student loans or car payments -- and none anticipated in the near future? You probably can handle a bigger nut.
You don't have to worry about retirement. Many teachers and civil servants have terrific pensions -- so good that to be sure they'll be fine, they just have to throw a few bucks each year into an IRA or deferred-compensation plan.
You're pretty sure your income will climb steeply in coming years. Fresh out of law school and doing a few years in the public defenders' office? If private practice is your goal and you don't want to wait to buy a home with the bigger income that's coming, stretching now can work out okay.