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CHAPTER VII -- REALITY CHECK

LESSON 13: HOW MUCH HOUSE CAN YOU AFFORD?

Now you know the basic things lenders look at on a loan application. But before we go any further, we should talk more about how to determine how much house you can afford.

Cost

Experts say most borrowers spend about a third of their incomes on home loans.



As we touched upon in the last lesson, lenders don't want too much of their borrowers' paychecks going toward debt service. To figure out if a customer owes too much, a lender will compute two debt-to-income ratios:

The housing expense, or front-end, ratio: This shows how much of your gross (pretax) monthly income would go toward the mortgage payment if you were approved. Lenders consider the entire payment, including any real estate tax and homeowner's insurance charges, rather than just the principal and interest payment. As a general guideline, housing payments shouldn't take up more than 28 percent of a borrower's income.

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Total debt-to-income, or back-end, ratio: This shows how much of your income would go toward all debt obligations, including the mortgage, car loans, child support and alimony, credit card bills, student loans and condominium association fees. Generally speaking, your total monthly debt payments should not take up more than 36 percent of your gross income.

ExampleLet's take a home buyer who makes $40,000 a year. The maximum amount of money available for a monthly mortgage payment, given a 28 percent of gross income cap, would be $933. The maximum amount available for all debt payments, given a 36 percent cap, would be $1,200. The following chart will help you see where you fit in:
Gross income
28% of monthly
36% of monthly
$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

(continued on next page)


 

TABLE OF CONTENTS

CHAPTER I
  Lesson 1
  Quiz

CHAPTER II
  Lesson 2
  Quiz

CHAPTER III
  Lesson 3
  Lesson 4
  Lesson 5
  Quiz

CHAPTER IV
  Lesson 6
  Lesson 7
  Quiz

CHAPTER V
  Lesson 8
  Lesson 9
  Quiz

CHAPTER VI
  Lesson 10
  Lesson 11
  Quiz

CHAPTER VII
  Lesson 12
  Lesson 13
  Lesson 14
  Quiz

CHAPTER VIII
  Lesson 15
  Lesson 16
  Lesson 17
  Lesson 18
  Quiz

CHAPTER IX
  Lesson 19
  Quiz

CHAPTER X
  Lesson 20
  Quiz

CHAPTER XI
  Lesson 21
  Quiz

CHAPTER XII
  Lesson 22
  Lesson 23
  Lesson 24
  Quiz

CHAPTER XIII
  Lesson 25
  Lesson 26
  Lesson 27
  Quiz

CHAPTER XIV
  Lesson 28
  Lesson 29
  Lesson 30
  Quiz

Definitions





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