Monday, March 06, 2006

David Bach and Mortgage Math

I spent most of this past weekend working on an article. It pertains to a topic that's near and dear to my heart:

IYM Article: David Bach and Mortgage Math

When I hear folks talk about buying "as much house as they can qualify for" because that's what their agent / broker / financial advisor told them was a smart move, I feel like throwing heavy office implements across the room.

What you can qualify for, and what you can afford, are two very different things. And folks had better learn the difference, because today's most popular financial gurus apparently don't.

Edit: The issue of what exactly constitutes a "housing expense" in the FHA guidelines is an intriguing one. Looking to shed some light on the topic, I found a HUD Affordability Calculator. Since that's coming "straight from the horse's mouth," as they say, I feel pretty confident with my calculations in the article. It appears as if "housing expense" is taken to mean PITI (principal, interest, taxes, and insurance), and that's what I used in the article.

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— Posted by Michael @ 2:44 PM


Good article, and I agree with most points. However, keep in mind that this 29% figure is supposed to be total housing cost, not just house payment. To me, total housing cost is P+I plus your insurance and property taxes plus maintenance. In this case, the house payment would not be $1200 for a $50K household, but it would be a lot lower. Unfortunately, a lot of people see the 29% figure and automatically assume that's the house payment alone - then they get into really big trouble when the tax bill arrives!


In building the payment to reach the 29% threshold, the only thing not in my payment amount is maintenance. The $1208 includes principal, interest, taxes (way estimated), and insurance (way estimated).

I know there's also a "rule of thumb" for estimating annual home maintenance costs, but I can't remember it just now.


It's very clear that David Bach has sold out to Wells Fargo Home Mortgage company. See this thread on the Retire Early Homepage discussion forum:

Anonymous Jay Gatsby
, at 8:36 AM, March 07, 2006  

Is that 29% / 41% guideline supposed to include utilities, also? Does anyone know?


Thanks for that link, Jay. Hadn't seen that forum before.


Glad to be of service. There are many posts of high quality information, and the people there actually speak from real life experience. Some even retired (with 7-figure nest eggs) in their late 30s!!!

Anonymous Jay Gatsby
, at 10:05 AM, March 07, 2006  

Rule of thumb for annual home maintenance costs: 1% of your home's value.

So if you buy an $180,000 house, you should put aside $1800/year (=$150/month) for maintenance.

I haven't done anywhere near an exhaustive search, but it seems that the 29/41 numbers do not including utilities. It's principal, interest, taxes, insurance, and any homeowners' association fees.

However, even that is not necessarily obvious, depending on the descriptions. Some imply that the debt is considered to be principal and interest only*, which may (as ghoosdum suggests) lead people to anchor** themselves to the idea that as long as their monthly mortgage payment isn't more than 29% of their monthly income, then they're fine.

Oh, and it gets worse. One thing I stumbled across in my browsing was the tidbit that the FHA has raised 29/41 to 31/43.***

Personally, I feel my finances were tight enough (TYVM!) when I bought my place, and at that point my ratio was 25/30. Higher numbers would have been technically possible, but realistically unliveable.

*Witness the definition of debt-to-income ratio at

**Yep. I've read Pleased?

***ML 2005-16 (ML = "Mortgagee Letter"). The direct URL is a monster, so here are two choices:

Word format:

Click-through: ,
click on "2005 Letters",
click on "35 05-16 Revised Qualifying Ratios and Treatment of Child Support"


Denise - thank you for all of the great information, and I thank you doubly for the links!


Okay. I'll go straight to the source. Check out this calculator at

HUD Affordability Calculator

Plug in a $50,000 income and zero other debt. See what comes up.

"Monthly Mortgage Payment / FHA Regular: $1210."

Looks to me like they're using PITI.


Michael, if you continue on with that page (choosing "Detailed estimate" and filling in your location), you will eventually get to a tabbed view where you can see what they consider to be part of the monthly payment.

It is as follows:
Principal & Interest
Property Taxes
Hazard Insurance
Homeowner's Assn. Fees
Other Costs
Mortgage Insurance

(Not sure what "Other Costs" is, though.)


Hey Micheal, don't know if you already knew this, but Mary Hunt is also a bit leery of Bach's philosophy. Was on her site today, and she was saying that she's not sure how he's going to get the Egglestons (his assigned Debt Diet family) to pay off $115,000 in debt in less than 3 years just by pinpointing their Latte Factors(which they'd get like $300 a month from), and getting the interest rates lowered on their cards.

Anonymous Anonymous
, at 3:43 AM, March 08, 2006  


Yes, I'm familiar with Mary's opinion of Bach. I subscribe to Debt-Proof Living, actually. I've been fortunate enough to be an occasional contributor to Mary's newsletter. (My review of Strapped will appear in the next issue, or the one after that.)

I seem to recall that Dave Ramsey, too, once took a call regarding what he thought of David Bach. Ramsey didn't say much, other than that he'd met and talked with Bach, and appreciated Bach's work. But it was still pretty apparent that Ramsey was "lukewarm" on some of the things that Bach espouses.

I guess it's nice to know that I'm not alone in my disdain for Mr. Automatic.


Make all calculations and thanks to Mr.Davidand his mortgage math.Now housing loan interest rates are falling all over,purchase one immediately please and never think about the hidden cost of your mortgage math or never think if the price of the house falls.Another syndrome.


When I mentioned to my wise aunt that I wanted to buy a house, she said to put the difference between my rent and a reasonable mortgage in the bank for a year to see if I could afford the house. More than a year later, I'm still in my apartment, saving that "difference" to get the down payment to bring the P&I&Tax to this amount I can afford. (AND a 3 month living expense emergency cushion)

Anonymous Anonymous
, at 8:43 PM, March 31, 2006  


As you know, I'm a personal finance newspaper columnist. I had a one-on-one interview with David Bach last week in Philadelphia. During the very conversational talk, he came off as much more conservative than his books might lead you to believe.

For home affordability, he basically punted, saying his recommendation came straight from HUD.

And this is a quote relevant to this thread:

"I would tell you, you probably shouldn’t want to spend more than a third of your take-home pay on housing costs, and that includes mortgage, taxes, insurance and maintenance."

Greg Karp

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


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