How Much Mortgage Can You Afford?
You can save yourself a lot of wheel-spinning if you take a few minutes to figure out how much mortgage you can afford. A lender will determine your maximum mortgage amount by using guidelines called debt-to-income ratios. This is simply the percentage of your monthly gross income (before taxes and other paycheck deductions are taken out) that is used to pay your monthly debts. Because there are two calculations, a "front" ratio and a "back" ratio, they are generally written in the following format: 33/38.
The front ratio is the percentage of your monthly gross income (before taxes and other paycheck deductions are taken out) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and other related expenses.
A common debt-to-income ratio is 33/38. A borrower's housing costs should consume no more than thirty-three percent of their monthly income. Add your monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of your monthly income to meet those obligations.
The guidelines are just guidelines and they are flexible. If you make a small, or 0%, down payment, the guidelines are more rigid. If you have marginal credit, the guidelines are more rigid. If you make a larger down payment or have an exceptional credit score, the guidelines are less rigid. The guidelines also vary according to the loan program. FHA guidelines state that a 29/41 ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.
I can help focus your attention on homes that are realistically within your budget. Better yet, I can help you find the hottest values as they come to market, so that you get more for your money.
The front ratio is the percentage of your monthly gross income (before taxes and other paycheck deductions are taken out) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and other related expenses.
A common debt-to-income ratio is 33/38. A borrower's housing costs should consume no more than thirty-three percent of their monthly income. Add your monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of your monthly income to meet those obligations.
The guidelines are just guidelines and they are flexible. If you make a small, or 0%, down payment, the guidelines are more rigid. If you have marginal credit, the guidelines are more rigid. If you make a larger down payment or have an exceptional credit score, the guidelines are less rigid. The guidelines also vary according to the loan program. FHA guidelines state that a 29/41 ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.
I can help focus your attention on homes that are realistically within your budget. Better yet, I can help you find the hottest values as they come to market, so that you get more for your money.
posted by Christina at 9:21 AM
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