When my husband and I were shopping for our first home, real estate folks kept telling us how much we could afford.

They would look over our gross income figures and declare that we weren’t shopping for “enough” house, meaning their numbers said we could afford a larger mortgage.

But my husband and I did our own calculations – using our net monthly income – to figure out what we could comfortably afford. We wanted to still be able to tithe, save for retirement, pay for the future education of our children and provide monthly financial support for my disabled brother.

Since the recent financial crisis, there have been a lot of efforts to make sure people understand the home-loan process and can determine how much of a mortgage they can truly afford. Effective Saturday, lenders are using simpler forms created as part of the “Know What You Owe” initiative by the Consumer Financial Protection Bureau. The new forms are designed to help borrowers locate key information and to make it as clear as possible how much debt they are signing up for.

While I definitely support the simplification of the loan process, I think people should be familiarized with this information long before they even go house hunting, let alone apply for a mortgage.

So, for this month’s Color of Money Book Club, my selection is for you future home-loan shoppers. And it’s free.


I want you to download and read the CFPB’s “Your home loan toolkit: A step-by-step guide.” Go to consumerfinance.gov and search for “Your Home Loan Toolkit.” There’s also a version in Spanish.

As part of the loan process, lenders are required to give you a copy of the guide as well as two new disclosure forms. Here’s one thing I need to point out: You might see the toolkit booklet branded with a lender’s own logo. Nonetheless, it’s created with the borrower in mind. You’ll be walked through various mortgage terms with explanations that I think are user-friendly.

The electronic version has fillable text fields and interactive checkboxes so you can save and print the information.

As you read through the booklet, you’ll see some symbols to drive home certain points. When you see a pencil, you’ll have an opportunity to face the numbers. But be mindful: The booklet’s worksheets are based on your gross income figures. Please do what my husband and I did and use your net monthly income. Or calculate it both ways.

You’ll be asked to write down the estimated principal, interest rate, mortgage insurance (which is often required for loans with less than a 20 percent down payment), property taxes, homeowner’s insurance and association fees. Add all that up to get your estimated monthly home payment.

Then you’ll be directed to calculate the percentage of your monthly income that will go toward your housing payment. “The general rule of thumb is that your total monthly home payment should be at or below 28 percent of your total monthly income before taxes,” according to the guide. This is your debt-to-income ratio. But again, this is based on your gross income. You know you don’t bring all that money home.


Take the numbers a step further and then figure out how much of your income is left after you pay for your housing and your other monthly debts. In my experience, if you’re spending more than about 36 percent of your net income on housing (principal, taxes, insurance, association fees), you’ll likely have trouble saving and managing other expenses.

Pay attention to the speech bubbles, which provide conversation starters for talking to others and gathering more facts. Please don’t just rely on the professionals who have a vested interest in your decisions. When you see a magnifying glass, you’ll get tips or links to do further research.

During one sales presentation when my husband and I were house hunting, the real estate broker kept saying, “Oh, you can afford this.” As he was pitching certain upgrades for the new home, he encouraged us to add on an expensive Jacuzzi bathtub with water jets.

Imitating the circling motion of such a tub, I said to him, “I can just swish the water around with my hands and save some money.”

The recent mortgage meltdown should have taught borrowers an important lesson: Don’t let anyone tell you what you can afford. Figure it out for yourself.

I’ll be hosting a live online chat about “Your home loan toolkit” at noon on Oct. 29 at washingtonpost.com/discussions. A representative from the CFPB will join me for the chat to take your questions about the guide.

Readers can contact Michelle Singletary at:


Twitter: SingletaryM

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