How Much House Can You Afford?
Deciding how much house you can afford is a personal decision in many respects. Several factors come into play. How much can I borrow? How much can I put toward my down payment? What size monthly payment can I afford?
There are no black and white answers to these questions. It’s a matter of give and take. If you plan on a 30-year mortgage, you can probably make a lower down payment (or perhaps no down payment at all) and still manage the monthly payments. If, on the other hand, you plan on a 15-year mortgage, you’ll probably want to make a larger down payment to keep your monthly payments in line with what you can afford.
Debt to Income Ratio
Your debt to income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met.
When it comes to debt to income ratio there is generally a debt limit associated with each type of loan, such as a 28/36 qualifying ratio for a conventional loan. These qualifying ratios are guidelines. An excellent credit history can help you qualify for a mortgage loan even if your debt load is over and above the limit.
Understanding the Qualifying Ratio
As for the debt to income ratio on typical conventional loans they have a qualifying ratio of 28/36. Usually an FHA loan will allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner’s association dues).
The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like car loans, child support and monthly credit card payments.
With a 28/36 qualifying ratio:
Gross monthly income of $3,500 x .28 = $980 can be applied to housing
Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 qualifying ratio:
Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
Remember these are just guidelines when it comes to the debt to income ratio. We’d be happy to pre-qualify you to determine how large a mortgage loan you can afford so you can buy a home that not only meets your expectations but also fits your budget. Call 1-888-848-1880 to learn more.