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How much house can you afford? |
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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.
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| Debt-to-income Ratios |
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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.) | |
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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):
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| Debt-to-income ratio examples |
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| $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:
Calculator
Armed with the above information, check out the Bankrate.com calculator, How much house can you afford? | |
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