The relevant ratio for mortgage underwriting is monthly income to monthly payment obligations. This means that the highest available mortgage amount depends on the interest rate. You get a very different answer if rates are 2.5% instead of 5.0%. That means a person with $80k is getting approved for a much smaller loan today than six months ago.

Rules of thumb like “mortgage amount should be less than 3x income” don’t make much sense because they ignore the interest rate.

"Rules of thumb like “mortgage amount should be less than 3x income” don’t make much sense because they ignore the interest rate."

They're fine as a rule of thumb. The individual should still run their own numbers to see if their limit is higher or lower.

Even at 2.5% interest, I have a hard time seeing anyone being able to responsibly buy a $450k house on $80k income. They might be able to swing it, but they'll be screwed as soon as a large unexpected expense comes up. Even a 2% property tax will eat close to 10% of their gross income. There's no way they could save for an emergency fund or properly fund a retirement account.

At 2.5% interest, the monthly payment on a 450k home is $1,778.

At 9% interest, the monthly payment on a 240k home is $1,931. Mortgage interest rates were higher than this throughout the 1980’s. They got as high as 18% which would yield a $3,617 monthly payment.

This means that the person who followed the “3x your income” rule in the 1980’s has a harder time paying the bills than the person who bought the home for 450k with a low interest rate.

This is a badly-formed rule because it ignores a key variable - the interest rate. Sometimes, it will prevent someone from buying a home they can afford. Other times, it will cause them to buy a home they can’t afford. There’s no need for such a rule, because mortgage payment calculators that take into account the interest rate are easily available. It’s like picking a shoe size based on how much you weigh instead of measuring how big your feet are. If it gives you the right answer, that’s out of sheer luck.

Of course, it’s necessary to also take into account factors like taxes and other expenses which vary from place to place and person to person, but a simple mortgage payment calculator is a good place to start.

And mortgage calculators can ignore many other variables, or would require additional research to fill them in. They also ignore a key factor - the person's income. It calculates cost, not affordability.

>There's no way they could save for an emergency fund or properly fund a retirement account.

I assume that is simply the way 80%+ of people in the US expect to live since it has been their reality for decades.

those numbers have also been in use for quite a while and have not adjusted for the inflation of other parts of basic living expenses.

Also, do the math on what happens if interest rates do anything but go down - it instantly means a huge swath of buyers can't anymore and the market dries up.

I was making $80k when I bought my house and was shocked when my bank told me I could buy a $450k home. I bought something for $260k instead.

This doesnt tell the whole picture and it isnt that simple. The lender is looking at your total carry costs for the home (property taxes, insurance, debt service), your non-home recurring costs (e.g., student loans, medical debt on monthly payment schemes, car payments) and your total income.

They dont usually care about wealth, they care about cashflows in vs out.

I had no other debt apart from a $15k auto loan and <$500 balance on my credit card, and $450k still felt like an enormous stretch. I was also only going in with 3% down.

That was my situation as well.

I’m not aware of any mortgages that allow that debt to income ratio for a mortgage. Unless it’s a rental and then the down payment requirements are insane.

A little while ago, when 3% loans were still a thing, a $450K loan over 30 years was a $1,900/month expense. An income of $80K with a $1,900/month in debt is a 29% DTI which is comfortably below the DTI limits for a conforming loan (43-45%).

Even at 5.5%, it's still "only" 38% DTI ratio.

- No one making $80K is going to have money for a $90K down payment so you have to add PMI - $300/month.

- you’re also ignoring property taxes and insurance. I pay another $400 a month for that in a relatively low cost of living state and I have a $5K deductible.

That 1900 adds up to $2800/month real quickly.