“How much house can I really afford?” We hear it all the time. The amount of mortgage you can be approved for is determined by two qualifying ratios:
Mortgage Payment to Income Ratio (“Front Ratio”)
This is simply your new mortgage payment (including property taxes, homeowners insurance, mortgage insurance, and home owners association dues if applicable) divided by your gross monthly income. (Remember, your gross monthly income is what you make before taxes or other withholding.) Generally, most lenders like to see that your monthly mortgage payment is not more than 29% of your gross monthly income. Example: If your gross monthly income is $5,000, your maximum mortgage payment including all taxes, insurance, mortgage insurance, and homeowners association dues (if applicable) is $1,450 per month.
5,000 x .29 = 1,450
Total Debt to Income Ratio (“Back” Ratio)
This is your proposed mortgage payment plus other monthly debt obligations such as car payments, student loan payments, credit card payments, and child support obligations divided by your gross monthly income. Generally, lenders like to see this ratio at or below 41%. These ratios may vary depending on other factors including but not limited to credit, savings pattern, down payment, and how much you will have in savings after purchase. Example: If your gross monthly income is $5,000 and you currently have $600 in monthly debts, your maximum mortgage payment including all taxes, insurance, mortgage insurance, and homeowners association dues (if applicable) is $1,450.
5,000 x .41 = 2,050 – 600 = 1,450
We think it’s a great idea to prepare a budget before you finalize your decision to buy a home. Knowing where your money goes and how much you can allocate toward a down payment and a monthly mortgage payment will allow you to make the best purchase decision.