Mortgage lenders are concerned with one thing - your
ability to pay back a mortgage. In order to qualify for a mortgage,
a lender will need to look at your credit history, you r
monthly gross income and how much cash you have for a down payment
and closing costs. Do you know how much house you can afford?
The amount of money you can afford to spend on a home
depends on your debt-to-income ratio. This ratio is two parts: the
front-end and the back-end.
The front-end ratio
The front-end ratio is what percentage of your
before-tax monthly income would go towards your monthly mortgage
payment. Most lenders follow the same guidelines. They require your
entire monthly mortgage payment, including principal, interest, real
estate taxes and homeowners insurance, to remain below 28% of your
gross monthly income. To find out how much your monthly housing
expense can be, multiply your annual salary by 0.28 and then divide
by 12. The answer is how much you can spend on housing.
The back-end ratio
The back-end ratio is your total debt-to-income ratio.
This is how much of your gross income is devoted to all of your
debts, including mortgage, auto loans, child support, alimony,
credit cards and other loans. Your total monthly debt obligation
should remain below 36% of your gross income. Simply multiply your
annual salary by 0.36 and divide by 12 to find your debt-to-income
ratio. The amount will be the maximum debt you can handle, according
to your lender.
How it works
For example, say you have a gross income of $40,000 a
year. The maximum amount for your monthly housing expenses is $933.
According to your income, you should not exceed monthly debt
payments of $1,200.
Most lenders will require that your housing cost be
under 26%-28% of your monthly gross income. They will be looking to
see that your debt-to-income ratio be below 33% to 36%. FHA loans
are more lenient, allowing 29% for your front-end ratio and 41% for
your back-end.
Remember, that your front-end ratio isn't just your
mortgage payment. Lenders will include the cost of taxes and
insurance to your housing expenses. When looking at purchasing a
property, it is important to get an estimate of both real estate
taxes and homeowners insurance premiums.
To secure a mortgage, you must have homeowners
insurance. When shopping around, make sure that you ask about any
special requirements a home might have, such as flood insurance or
coastal area wind coverage.
If you put less than 20% down on
the purchase of your new home, you will have to obtain private
mortgage insurance (PMI), which will be added to your monthly costs.
Association or condominium fees may also be added to your front-end
ratio. Make sure that you consider the total cost of a home when
considering making an offer.
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