How much house can you afford?
Mortgage lenders are chiefly concerned with your ability to repay the mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment. So how much house can you afford? To know that, you need to understand a concept called "debt-to-income ratios." Debt-to-income ratios The standard debt-to-income ratios are The housing expense, or front-end ratio and the total debt-to-income, or back-end ratio. | Debt-to-income Ratios | | | |
Example Take a home buyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income would be $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.) Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200. ($40,000 times 0.36 equals $14,400, and $14,400 divided by 12 months equals $1,200.) Example The following chart shows your maximum monthly payment and maximum allowable debt load based on your gross annual income (remember, gross income is pre-tax income): | Debt-to-income ratio examples | |
|
$20,000 | $467 | $600 | $30,000 | $700 | $900 | $40,000 | $933 | $1,200 | $50,000 | $1,167 | $1,500 | $60,000 | $1,400 | $1,800 | $80,000 | $1,867 | $2,400 | $100,000 | $2,333 | $3,000 | $150,000 | $3,500 | $4,500 |
Here's a look at typical debt ratio requirements by loan type: Taxes and Insurance In addition, lenders include the cost of taxes and insurance when calculating how much house you can afford:
|