Budget Basics

• When you set up a budget, you need to consider all of your primary expenses and those that are discretionary, such as entertainment and eating out. Housing, car payments, student loans, and other living and debt commitments typically account for major budget outlays for people. Rent or housing payments can range from a few hundred dollars to a few thousand dollars, depending on your income and investment in home ownership.
  
  

Debt-to-Income Ratio

• Regardless of how much you want to put toward housing each month, your mortgage lender usually has the most say in how much you get in loan financing. Debt-to-income and mortgage-to-income are two common ratios used by lenders. Conventional lenders typically prefer that borrowers stay at or below a 36 percent debt-to-income ratio. This means your monthly home, car, student and personal loan obligations cannot exceed 36 percent of your gross monthly income unless you put more than 20 percent down or have significant assets.
  
  

Mortgage-to-Income Ratio

• A mortgage-to-income ratio is more specific to your housing payment relative to income. If you have fewer non-mortgage debts, you can typically use closer to the 28 percent maximum ratio standard for conventional loans. If you have significant personal and car loan amounts, you likely cannot reach the 28 percent mortgage-to-income ratio without exceeding the debt-to-income maximum. If you make significant charitable donations or have other expenses not usually included in income ratio calculations, you might consider staying well below the maximum guidelines anyway.
  
  

FHA Loans

• For borrowers who cannot afford 20 percent down on a conventional loan, the Federal Housing Authority offers a loan program with easier qualifying credit and a 3.5 percent minimum down payment requirement. FHA loans have slightly higher mortgage-to-income and debt-to-income ratios of 29 and 41 percent, respectively. This is to allow for required FHA mortgage insurance premiums, which protects the lenders from loan default. You still need to consider your other budget concerns even if you can stay within these maximum income ratios.