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Published on March 13, 2008

Online calculators can give a ballpark idea but should not be relied on for a final decision, said Paul Cocozza, a certified financial planner in Arlington, Virginia. "That's taking too much of a shortcut for such a large commitment."

How to decide? Your budget is a function of your income, household expenses, credit and savings.

Traditionally, the guideline was that no more than 28 per cent of gross income should go towards housing expenses, including the mortgage payment, home-owner's insurance, home-owners'- or condo-association fees and real-estate taxes. No more than 36 per cent would go towards those housing costs plus all other debt expenses, including car notes, school loans and credit-card payments.

Many lenders have stretched those requirements, allowing up to 39 per cent of gross income to go towards housing and other debt. But just because a lender says you can afford a loan does not mean you should spend that much.

Peter Hebert, mortgage broker at Allied Home Mortgage Capital in Ellicott City, Maryland, said buyers should be cautious: "If you're going up to 50 per cent, which we will do, you're going to be living pay cheque to pay cheque. You're only a broken leg away from going bankrupt."

Those ratios do not cover every possible expense a prospective buyer is responsible for, including some substantial ones like childcare.

"Most buyers have a reasonable idea of what they can afford," said Deborah Knuckey, author of "The Ms Spent Money Guide: Get More of What You Want with What You Earn". She suggests budgeting software like Quicken or Microsoft Money to track spending for those who do not know where their money goes in a year.

Lenders' ratios do not even cover all of the costs associated with owning, such as maintenance.

"How much a lender is willing to lend you is not a useful number," said Harvard law professor Elizabeth Warren, co-author of "All Your Worth" and "The Two-Income Trap".

"That's a little like asking the clothing salesman how many sweaters you should own."

She recommends keeping fixed expenses, including mortgage payments, at or below 50 per cent of after-tax income.

People often use the rent they have been paying as a guideline for the mortgage they can afford. But Knuckey said owning a house was much more expensive than renting, even taking into account the tax break for mortgage interest. "I think people generally underestimate how much they're going to want to do, between the decorating and the maintenance."

Cocozza agrees, especially because without savings on hand, owners will often pay those expenses by credit card. "The last thing you want to do when you buy a place is increase your consumer debt. It's hard to get out of that."

Mary Ellen Slayter

The Washington Post

Washington