Buyer Guidelines

• The very conservative banker guideline is for a home buyer to have a mortgage-to-salary ratio of two to two and a half times. In other words, if your family income is $100,000, then you can have a mortgage of $200,000 to $250,000. Based on the interest rate, your mortgage payments will vary. The general guidelines are that mortgage payments should not exceed 28 percent of your income. In addition, your total debt payments including auto, school and credit card payments, should not exceed 36 percent to be safe.
  
  

Historical Ratios

• In 2007, the Harvard Joint Center for Housing Studies issued a report detailing the median income to median sales price for communities throughout the country and the nation as a whole. It found that between 1980 and 2000, the ratio of housing price to income held fairly constant at between 2.9 and 3.1 times income. In 2001, the ratio suddenly jumped to 3.4 times income, and skyrocketed up to 4.6 times income by 2006, setting up for the major crash that followed as most could no longer afford to buy a home at those levels.
  
  

Outlier Ratios

• Outlier communities were hit especially hard as their price-to-income ratio soared in the 2000s. By 2006, the ratio for Las Vegas was 5.9 times income, 7.2 times income for Miami and an astounding 10.0 times income for Los Angeles. In other words, those in the Los Angelos metro area that had a family income of $100,000 were buying $1 million homes. Of course, these communities saw the highest number of delinquent payments and foreclosures as the housing bubble popped.
  
  

Mortgage Terms and Interest Rates

• Calculating mortgage-to-income ratios requires you to take into account the interest. Higher interest payments necessarily lead to lower principal payments if you wish to remain within the 28 percent guideline. In 2011, mortgage rates were low by historical standards with 30-year loans at five or six percent. With lower interest rates, you should lock into a fixed mortgage plan where the rate does not swing with the market. Part of the reason for so many defaults during the 2006 housing crisis was due to adjustable rate mortgages that rose with the market and made the payments impossible to pay for too many homeowners.