Crunching Numbers: How Much Home Can You Afford
How Much Mortgage? The Answer Isn’t Cut and Dry
It’s the number one question first-time home buyers ask themselves before they hit the Internet in search of homes – how much home can I afford? While you would think the answer is a simple matter of doing the math, in reality, the answer to this question can depend on a variety of factors, including your income, location, savings, and more.
But you can still gain an idea of how much of a mortgage you can afford by doing a thorough evaluation of your income and your monthly debt obligations. This is called the back-end debt-to-income ratio.
Determining Your Back-End Debt-to-Income Ratio
When determining your back-end DTI ratio, you need to compare your expected monthly housing payments against your total monthly income and all of your other monthly debt obligations, as well. This can include, but is not limited to, your:
- Monthly minimum credit card payments
- Monthly child support or alimony
- Monthly car loan or lease payments
- Monthly insurance policy payments
- Monthly payments to an installment loan such as a timeshare
Traditionally, your lender will want you to have a back-end DTI ratio of 36% or less, and this is the ideal situation. Having a DTI over 36% will not necessarily disqualify your loan application, but it will make it a little harder to get the loan you want. Therefore, if you’re above 36% with the anticipated mortgage payment amount, then you may want to look for a less expensive home to get you closer to the target range.
Determining Your Front-End Debt-to-Income Ratio
Another option to use to determine how much home you can afford is to calculate your front-end DTI ratio. This is similar to how you came up with your back-end DTI ratio, except it doesn’t take into account your monthly debt obligations. Instead, this process compares only the expected monthly housing payment against your income.
Included in the expected monthly housing payment are such things as the monthly principal and interest amounts, real estate taxes, homeowners insurance, and association dues (if applicable).
Banks that use the front-end DTI ratio in their considerations will want you to have no more than 28% DTI. This means that the bank doesn’t want more than 28% of your total monthly income to be allocated to your housing payments. Of course, you can still get approved for a mortgage if your DTI is higher than 28%, but it isn’t the norm.
Use a Mortgage Calculator
If you don’t have the time or patience to sit and go through all of your debts, then why not let Homes.com help you out? We have a convenient mortgage calculator that you can use to help give you a more firm handle on your financial situation.
A mortgage calculator doesn’t guarantee loan acceptance and approval. This tool is only used to help you learn more about your financial limits. When used in that capacity, a mortgage calculator can be a worthwhile tool to help you determine approximately how much home you can realistically afford.
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