Do You Know How Much House You Can Afford?
When you begin applying for a mortgage, the first concern addressed is exactly how much house you can afford. To qualify for a mortgage, your credit history, monthly gross income and the amount of cash you can accumulate for a down payment are all put into consideration. To help figure out how much house you can afford, you need to keep in mind your debt-to-income ratio.
There are two parts of a debt-to-income ratio. First, is the front-end ratio, or housing expense. This ratio shows how much of your gross monthly income, before tax, would go toward your mortgage payment. Your monthly payment (including principal, interest, real estate taxes and homeowner insurance) should not exceed 28% of your gross income.
To figure out your front-end ratio, multiply your annual salary by 0.28. Divide the given number by 12 (months) and you end up with your max housing expense ratio.
Second is the back-end ratio, or total debt-to-income. This ratio shows you how much of your gross income should go toward your debt obligations. These debt obligations include not only your mortgages, but any car loans, child support, alimony, credit card bills, student loans and condominium fees. Keep in mind that your monthly debt obligation shouldn’t exceed 36%.
To figure out your back-end ratio, multiply your annual salary by 0.36. Divide the given number by 12 (months) and you find your max allowable debt-to-income ratio.
In addition to the above, you should also include the cost of taxes and insurance in how much house you can afford. Since property taxes are a part of your monthly payment and you have to insure your property to get a mortgage, you should keep these fees in mind when determining how much house you can afford.
To get an exact estimate, check out our mortgage calculator.