How Much Home Can You Afford to Buy?

Knowing how much house you can afford begins by listing the type of features you’d like to have in a home.  Your individual needs, location requirements, style and the amount of effort you are willing to put into finding your dream house, all factor into the equation. How important is it for you to be near a school?  How long will it take you to commute to work?  How much will you spend on gas to commute to work?  How safe is the neighborhood?  These are all legitimate questions that can help you choose your ideal home.

Have a range in mind before you go house hunting. What’s the minimum and maximum amount you can afford to buy? For instance, if you’re considering purchasing a house in the $200,000 to $250,000 range, a down payment of $20,000 could be the difference between an additional $200-$300 monthly on a higher priced home.

Why debt ratios are important to lenders
Your debt-to-income ratio is a simple way of showing lenders what percentage of your income is available for a mortgage payment after taking all of your other debt obligations into consideration. You may see conventional loan debt limits referred to as the 28/36 qualifying ratio with FHA and VA loan ratios typically running higher at 29/41. Both numbers are percentages that are used to examine two unique aspects of your debt load.

The first number, or the front-end ratio, indicates the maximum percentage of your monthly gross income that the lender is willing to allow for housing expenses. This total includes payment on the loan principal and interest, private mortgage insurance (PMI), property taxes, and hazard insurance, collectively referred to as PITI, and homeowner’s association fees, if any.

The second number, or the back-end ratio, indicates the maximum percentage of your monthly gross income that the lender is willing to allow for housing expenses plus recurring debt. This total includes credit card payments, child support, car loans, and other obligations that extend beyond 6-10 months to repay.

Debt-to-Income Example

        Front-end Ratio

        Back-end Ratio

 

Yearly Gross Income = $45,000
Monthly income = $3,750
Housing expense ratio x .28
Allowable housing expense
without recurring debt = $1,050

 

Yearly Gross Income = $45,000
Monthly income = $3,750
Housing expense ratio x .36
     Allowable housing expense
with recurring debt = $1,350

If you’re unable to come up with a down payment to obtain a loan close to what you’re paying for rent, then consider lowering your debts to decrease your back-end ratio to pre-qualify for a higher loan amount. However, depending on the lender, some have been known to approve back-end ratios as high as 60%. More aggressive lenders even offer 100% financing with no stated income, no ratio pre-determination, and no income verification mortgages.

Once you have an idea of how much additional debt you might qualify for, then you can experiment using one of the many mortgage rate calculators on the Internetby inserting different variables (e.g., expenses, credit card loan balances, down payments, etc.) to determine how much home you can afford.

 

© Copyright 2010, Informa Research Services, Inc. (“Informa”). While all attempts have been made to provide effective, verifiable information in this article, neither the author nor Informa assumes any responsibility for errors, inaccuracies, or omissions. You should always seek the guidance of a licensed professional before making any major financial decisions.

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