How much house can you afford?

Mortgage lenders are chiefly concerned with your ability to repay your mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment, which generally runs anywhere from 5 percent to 20 percent of the purchase price of the home.

So how much house can you afford? You can easily calculate the answer using two standard debt-to-income ratios:

• The housing expense, or front-end ratio, shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing expense, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense.
  
  
• The total debt-to-income, or back-end ratio, shows how much of your gross income would go toward all of your debt obligations, including mortgage, car loans, child support and alimony, credit card bills, student loans and condominium fees. In general, your total monthly debt obligation should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.

• Real estate taxes: Because property taxes are part of your monthly mortgage payment, it is important to get an estimate of what yours would be. Ask your real estate agent or tax office for the rates that apply in the area you want to buy.
  
  

• Homeowners insurance: You must insure your property to obtain a mortgage. You can get an estimate of insurance costs from your insurance agent or a major insurance company in the area where you are house hunting. Be sure to inquire about special requirements for hazard insurance, such as mandatory coverage for floods, earthquakes, or wind in coastal areas. If you put down less than 20 percent of your home's value, you also will have to obtain private mortgage insurance (PMI).

• Conventional loans
  Housing costs: 26-28 percent of monthly gross income
  Housing + debt costs: 33-36 percent of monthly gross income
  
  
• FHA loans
  Housing costs: 29 percent of monthly gross income
  Housing + debt costs: 41 percent of monthly gross income

Calculator
Armed with the above information, check out the Bankrate.com calculator, How much house can you afford?

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