| How Much House Can You Afford? | back |
| Qualifying
Ratios The amount of loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a "safe" amount for your mortgage payments. A fairly standard ratio is 33/38. Certain mortgage plans sometimes use more liberal ratios - for example, the FHA currently uses 29/41. Front Ratio Here's how it works: With a 33/38 ratio, the "33" is called the "front ratio." This is the maximum percentage of your monthly gross income a lender would like to see you spending on your monthly housing costs, including principal, interest taxes, insurance and any Homeowner's Association fees. Even if you don't pay your property taxes and homeowner's insurance monthly, as part of your mortgage payment, the lender will calculate it as if you do when determining your ratios. Back Ratio The "38" is called the "back ratio." The lender adds your monthly consumer debt (car payments, credit cards, etc.) to your monthly housing costs, and determines how much you spend on these obligations as a percentage of your gross monthly income. A "38" back ratio means that, as a maximum, this figure should be thirty-eight percent of your monthly income. Example: If you make $5000 a month, your maximum monthly housing cost should be around $1650. Including your consumer debt, your monthly housing and credit expenditures should be around $1900 as a maximum. The Rest is Easy - Sort of Once you know your maximum payments, you just start subtracting. You have to do a little estimating, too. Estimate what your monthly taxes and insurance will be and subtract them from your maximum payment. That leaves you with the principal and interest payment. Use our calculator and plug in the payment and the current interest rate. The calculator will automatically calculate your loan amount. Then you just add in your down payment and you know how much house you can afford. |
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