How Much House Can You Afford?
Debt-to-Income Ratio. It is a key term that you'll become familiar with when you start the house buying process. It includes a formula that is used to determine the maximum mortgage amount that you qualify for when making a house purchase. It is used by lenders to find out how much house you can afford.
Your personal debt-to-income ratio is the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts. There are two calculations commonly used by lenders: "front" ratio and a "back" ratio.
The "front" ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The "back ratio" includes the same information, but also takes into account your monthly consumer debt. This can include car payments, credit card debt, installment loans, and other related expenses.
A common guideline for debt-to-income ratio is 33/38. This means that your housing costs cannot exceed 33 percent of your monthly income. If you add your monthly consumer debt to the housing costs, you should have no more than 38 percent of your monthly income dedicated to meet those expenses.
For example: If you make $5,000 a month and apply the above guidelines, your maximum monthly housing cost should be approximately $1,650. If you include your consumer debt, your monthly housing and credit costs should be around $1,900.
Keep in mind that these guidelines are flexible. If you make a small down payment or have bad credit, the guidelines are stricter. If you make a large down payment or have excellent credit, the guidelines are less strict. This will give you a basic idea of what you can afford and if it is the right time to buy a house. In some cases, you might need to keep saving and paying down those credit cards.
Florida real estate license school
About the Author
Heather Brunson is a lead marketing writer for a Florida real estate license school. She has a B.A. in Journalism with an emphasis on public relations. She has additional experience in technical writing.
Tell others about
this page:
Comments? Questions? Email Here