28 Percent Income to Mortgage

• According to the Federal Housing Administration, the correct mortgage-to-gross-income ratio is 28 percent. The gross income is simply yearly salary divided by 12. The 28 percent guideline is designed to limit borrowers from taking on too much housing expense. The mortgage includes principal, interest, insurance and tax payments. For example, at a salary of $71,000 per year, monthly gross income equals $5,916. The 28 percent guideline at $5,916 results in a maximum mortgage payment of $1,656 per month.
  
  

Two-and-a-Half Income to Mortgage

• A less-comprehensive guideline is the ratio of salary to mortgage. According to Lendingtree, the proper guideline for the price of a house is at or below two and a half times gross salary. In addition Lendingtree recommends a 20 percent down payment. This guideline does not take into account other debt. For example if an individual makes $71,000 per year, then the maximum mortgage level is 2.5 X $71,000 or $177,500. In addition in this scenario, the guideline requires a down payment of $35,500.
  
  

35 Percent Income to Total Debt

• The FHA also requires a monthly income-to-debt ratio of 35 percent. The FHA has a calculator that produces the required gross salary for a given mortgage, including other debt servicing. For example, the calculator has input cells for the desired mortgage, monthly taxes, insurance and other debt such as car payments, student loans and credit card minimum payments. These inputs produce a minimum yearly gross salary level for a given mortgage.
  
  

Warning

• Banks no longer hold onto mortgages for long periods of time and therefore are more willing to make risky loans. Just because a bank is willing to loan someone a large mortgage does not mean it is a good idea to take out such a large loan. Housing incurs many costs on new owners. A major applicance might need to be replaced, heating or cooling systems can fail, roofs eventually must be replaced, and electrical or plumbing systems can break down. Home buyers should plan for the worst and set aside a portion of their salary to tackle repairs rather than opt for the maximum mortgage the bank approves.