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Can You Keep Making Your Monthly Payments?

There is no point in putting time and effort (not to mention emotional energy) into trying to hang on to your house if you really, truly can’t afford it. If, for example, you were one of the many homebuyers in recent years who were counting on your house’s value going up so you could refinance your way out of an unfavorable mortgage, you may have no choice but to move.

Many of my bankruptcy clients report that they are current on their mortgages but just about to go under. It’s not uncommon for them to have been paying upwards of 50% of their gross (not take-home) income towards their overall mortgage debt. That leaves little or nothing left for food, utilities, transportation, out-of-pocket medical costs, and the like. Quite simply, their economic position is untenable.

Here’s how to think about whether or not you can really afford your current loan.

Use the Standard Ratios

For decades, the conventional wisdom was that you shouldn’t pay more than 25% of your gross income for shelter. Slowly, that figure crept up to 33% as lenders relaxed their rules and prices rose. Under this thinking, if you are paying more that 33% of your gross income on your house, you aren’t going to be able to keep it up. So, for example, if you are paying a monthly total of $3,300 for all your mortgage-related debt (including your first mortgage, a second mortgage, a home equity loan, property tax, and insurance), your gross income should be in the neighborhood of $120,000 a year. If your income is $75,000 a year and you adhere to the 33% rule, your shelter-related payments shouldn’t exceed about $2,060 a month. If your property taxes are particularly high, you may have to exceed the 33% rule to keep your home.

Obviously, this is a cookie cutter approach. If, for example, you have a child with special needs or two kids in college, your payment might not be affordable even if it’s below the 33% threshold. And if you have few other expenses (for example, you live simply, don’t own a car, and grow some of your own food), you might be able to afford a mortgage payment that is a higher percentage of your income.

How Much of Your Income Should Go to Your Mortgage?

Annual Gross Income	Maximum Mortgage Payment
	25% of monthly income	33% of monthly income
$50,000	$1,042	$1,375
$75,000	$1,562	$2,062
$100,000	$2,083	$2,750
$125,000	$2,604	$3,437

Use an Online Calculator

The Internet is chock full of calculators that purport to tell you how much house you can afford. They’re very easy to use, but they make some assumptions that might not quite work for you.

My favorite is the Nolo mortgage affordability calculator. To use it, go to www.nolo.com/calculators, then click “How much mortgage might I qualify for?” Another one of my favorites, at the CNN Money website, assumes a loan is affordable if:

• your mortgage payment is no more than 33% of your income, and
• your total non-mortgage debt payments (credit cards, student loans, and the like) aren’t more than 36% of your gross income.

You can find the CNN Money calculator at http://cgi.money.cnn.com/tools/houseafford/houseafford.html. For other calculators, Google “home affordability calculators.”

As I said, these formulas tell you how much you can borrow, according to the general opinion of the housing finance industry. They may be somewhat dated given the current chaos of the mortgage and credit markets.

Do a Budget

You can take a no-nonsense look at your income and expenses and see whether there is room in your budget for your current or projected mortgage payments. If the numbers don’t add up the first time around, see what you can trim.

Don’t know where to start? You’re not alone. (Once upon a time we all had to learn about budgeting before we could graduate from high school. No more. Most of us are clueless.) But as you might guess, lots of websites offer budgeting software and spreadsheets. One that offers a combination of free and low-cost services is www.debtsteps.com/budget-calculators.html. Or just search for “online budget planning” to come up with a list.

Ask a Budget-Counseling Agency

Everyone who files for bankruptcy must, by law, take a budgeting class. To meet this demand, hundreds of companies, for-profit and nonprofit alike, have set up shop to deliver debtor education classes. These organizations can also help you with budgeting, even if you’re not planning to file for bankruptcy.

The courses are taught online or by telephone and mail. The fee averages about $50.

For a list of agencies that have been approved by the Department of Justice for bankruptcy purposes—although you don’t have to file for bankruptcy to use them—go to www.usdoj.gov/ust/eo/bapcpa/ccde/de_approved.htm. Consumer Credit Counseling Services of San Francisco (www.cccssf.org, 800-777-7526), is an excellent choice. Because budgeting is pretty much the same no matter where you live, and because you don’t need to show up in person, you can use a service even if it’s far from where you live.

Last but certainly not least, HUD-approved housing counselors can also provide budgeting help to people trying to save their homes from foreclosure. (See Ch. 4.)