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 Dear
Dr. Don,
Are these "how much house you can afford" calculators realistic? The homes in my area (Alexandria, Va.) range from $300,000 to millions. According to the calculators, I can't even get $100,000 homes. What am I to do?
I'm a single woman in my mid-20s with a salary of $59,000. I only have student loan ($13,000) and a car loan ($11,000), which amounts to an expense of $600/month for debt. I'm willing to buy and get a roommate. Is that my only option these days? Thank you.
-- Yolanda Young
 Dear
Yolanda,
These home affordability calculators are based
on mortgage loan origination ratios known as the
front ratio and the back ratio. The Bankrate
glossary defines the front
ratio as, "The percentage of monthly
before-tax income that goes toward a house payment
-- a key ratio that lenders use when deciding
whether to approve a mortgage application. Traditionally,
lenders didn't like it when the total mortgage
payment (principal, interest, taxes and insurance)
divided by gross monthly income exceeded 28 percent.
Modern risk-based pricing, however, has made lenders
more flexible."
The Bankrate glossary defines the
back
ratio as: "The sum of the house payment
and all other monthly debt -- credit cards, car
payments, student loans and the like -- divided
by before-tax income. Traditionally, lenders were
loath to extend borrowers' back-end ratios past
36 percent, but they often do now."
With a front ratio of 28 percent,
you could afford monthly housing costs (PITI)
of $1,377. Ignoring taxes and insurance; that
means you could afford a $215,000 loan. Assume
annual property taxes of $2,500 and annual insurance
expense of $1,500 and you can afford a $160,000
home. That's pretty close to what Bankrate's home
affordability calculator
shows ($169,678) with your income and loan numbers,
plus these hypothetical tax and insurance expenses,
and assuming you have $40,000 for a down payment.
Getting a roommate can help with your cash flow but won't do anything on the front end to help you qualify for the mortgage. The typical mortgage for a primary residence won't consider the rental income from a roommate in qualifying you for the loan.
I don't have a ready answer for you as to how you can buy real estate in your market on your salary, but I can tell you that the home affordability calculators are pretty much on target when it comes to how much home you can afford.
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