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Can I afford my mortgage payment?


Dear Dr. Don,
Hello. My wife and I plan on building a house this year. She is starting a new job in January as a radiology technician. She will earn anywhere from $30,000 to 40,000 a year. I have owned my business for eight years. It is a retail store at a mall. I earn about $30,000 a year.

We own both of our cars. The monthly payment on our mortgage will be about $1,300. Do you think that mortgage payment is too much for us? I have done some research on the Web and learned that we should be OK. But I am a worrier and wanted to get an expert's opinion. I tried to consider all our monthly expenses like the phone bill, cable, electric, etc. What do you think? Thanks. -- Ron Reassurance

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Dear Ron,
Lenders typically want your housing expenses to be no more than 28 percent of your monthly gross income. That number includes a pro rata share of the property taxes and homeowners insurance, even if you're not required to make escrow payments for taxes and insurance, along with the monthly mortgage payment. It's called the front ratio. Lenders also don't want all of your monthly expenses to exceed 36 percent of gross monthly income. That number is known as the back ratio.

You need to know a few more variables besides the mortgage payment to figure out if you can afford this mortgage. What will the homeowners insurance cost? What will the property taxes cost? Will you be required to pay private mortgage insurance? All of these costs are lumped together in the front ratio. I've put together an example that shows how you measure the front ratio.

How to measure front ratio

Annual gross income:



Monthly gross income



Front ratio @ 28%



Back ratio @ 36%




Pro rata property taxes:



Pro rata homeowners insurance:



Mortgage Insurance (if required):



Mortgage payment:



Home expenses:



Front ratio:



It will be difficult to qualify for a mortgage until your wife starts working with her new employer at a stated salary. Because you're self-employed, a lender will take a close look at your income history, too.

With a low back ratio, a lender may be more flexible about your front ratio coming in over 28 percent. Once you've been able to calculate your front and back ratios you can shop lenders and ask what ranges they accept for these two ratios.

Even though lenders don't have to consider it, you should consider what expenses might be on the horizon. For example, you don't have a car payment. Do you expect that to change anytime soon? What would a car payment do to your monthly budget?

An emergency fund equal to three to six months of living expenses can help in seeing you through financial emergencies. It will be hard to set money aside while you're building and furnishing a new house, but if you don't have one already, it should be a priority to establish an emergency fund. That's especially true for you as the owner of a retail business.

-- Posted: Nov. 4, 2002




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