 Seeing
if you can afford that house
|  Dear
Dr. Don,
My wife and I are considering moving to another
state. Only one of us would be able to keep our job. We would sell
our current house, but I am wondering how we would be able to qualify
for a new mortgage if I'm not working? Paying off our current mortgage
would leave us with our only debt being two car leases. We think we
could profit about $130,000 on the sale and are looking to buy in
the $250,000 to $300,000 range. -- Duane Down payment
 Dear
Duane,
Lenders determine your ability to afford the
mortgage payment based on your monthly housing expenses compared
to your gross monthly income, which is also called the front ratio;
and your total monthly expenses compared to your gross monthly income,
which is called the back ratio. Mortgage underwriting standards
can vary by lender, but it's typical for the lender to require a
front ratio of no more that 28 percent and a back ratio of 36 percent.
So the principal, interest, taxes and insurance, known
as PITI, on your mortgage loan shouldn't exceed 28 percent of your
monthly pretax income, and all monthly loan obligations including
the mortgage shouldn't exceed 36 percent of your monthly pretax
income. A lender can often be more flexible on the back ratio than
it can be on the front ratio.
Bankrate has a housing
affordability calculator that can help you determine how much
house you can afford. The monthly mortgage payment on $100,000 at
6 percent is $599.95. That means that a $150,000 mortgage would
have a $900 monthly payment. Add taxes and insurance of $500 per
month and you're up to a PITI of $1,400. That's 28 percent of a
$5,000 monthly gross income.
That means your wife would have to earn $60,000 per
year in my hypothetical example for you to have a front ratio of
28 percent. Let's assume a couple of car lease payments at $250
per month. That's a total of $1,900 per month in loan payments.
For the $1,900 to be no more than 36 percent of your gross monthly
income, the monthly income would have to be at least $5,278 or an
annual income of $63,336.
Without knowing your potential income either individually
or as a couple, it's hard to determine if you can afford a house
in the price range that you're considering. I have, however, given
you the tools for you to determine if you can afford the house.
Good luck with the move.
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