How To Think About Debt When Buying A Home

Services for Real Estate Pros with Think Glink Media

Michelle sent me the following question:

I am currently reading your book 100 Questions Every First-Time Home Buyer Should Ask because my husband and I are hopefully buying a home within the next year. It is a very helpful book! There is something I never understand, and I thought, who better than you to ask?

Why is it that worksheets/calculators online always ask for my GROSS income? What I actually net is about a third of my gross, between contributions to my retirement, taxes, and other deductions. Shouldn’t I be using my net to do calculations? Thanks!

Here's how I responded:

This is a great question, Michelle, because it gets at the heart of the difference between how lenders and home buyers look at the numbers.

Mortgage lenders will calculate based on your gross monthly income—but as you've already figured out, net income is a whole different ball game. After you subtract federal, state, and local taxes and any withholdings you've set in place for a cafeteria health plan or retirement account, you might not be left with a whole lot.

In your case, your take-home pay is about a third of your gross income, so I can understand why the numbers you're getting from a lender might seem extraordinarily high.

With a conventional mortgage, a lender will allow you to spend up to 28 percent of your gross monthly income on your monthly principal and interest payments, your real estate property taxes, and your homeowner’s insurance premium, and up to 36 percent on all debt payments (including housing-related debt). The extra 8 percent includes things like a car loan, school loan payments, and credit card debt. If you don't have any other debt, lenders will allow you to spend up to 36 percent on your mortgage, taxes, and insurance payments.

But that 36 percent is more than a third of your gross income, and for many Americans, it can feel like nearly half of your take-home pay. For example, if you earn $60,000 per year, that's $5,000 per month. Thirty-six percent of $5,000 is $1,800. If you're pocketing only $1,650 per month (one-third of your gross monthly income), the lenders' numbers are going to feel completely out of whack—and financially impossible to pull off.

To read more of my response to Michelle, including what payments might allow her to still feel financially comfortable while paying off her mortgage, read the full blog post at

Ilyce Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at, The Equifax Personal Finance Blog and CBS Moneywatch She is Chief Content Strategist at, a community for real estate investors.


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Barbara Hensley
RE/MAX Properties - Rockwall, TX
Homes for Sale in Rockwall County, Texas

Well said and good information.

Nov 12, 2010 12:50 AM #1
Dawn Crawley
Dawn Crawley Realty - Pinehurst, NC
Find Pinehurst Homes

I remember when I bought my first home years (many) ago. When I got qualified, I could have purchased way more than I felt comfortable with. I think this is partially what happened in our industry (besides fraud, 100% financing, etc). If you have to struggle every month to reach you payments, and you don't have a savings buffer, you could be in big trouble with a job loss or other tragedy. 

Nov 12, 2010 12:54 AM #2
Dan Edward Phillips
Dan Edward Phillips, Humboldt and Del Norte Counties, CA - Eureka, CA
Humboldt and Del Norte Counties, CA

Good Morning Ilyce, great information for home buyers.

Nov 12, 2010 01:37 AM #3
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Ilyce Glink

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