New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
- advertisement -
Bankrate.com
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Equity
Auto CDs &
Investments
Retirement Checking &
Savings
Credit
Cards
Debt
Management
College
Finance
Taxes Personal
Finance

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

- advertisement -

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:

 $65,000

 

Monthly gross income

 $5,417

 

Front ratio @ 28%

 $1,517

 

Back ratio @ 36%

 $1,950

 
 

Annual

Pro rata property taxes:

 $250

 $3,000

Pro rata homeowners insurance:

 $83.33

 $1,000

Mortgage Insurance (if required):

 $-  

 

Mortgage payment:

 $1,300

 

Home expenses:

 $1,633.33

 

Front ratio:

30.15%

 

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
   

 

 
 

 

Looking for more stories like this? We'll send them directly to you!
Bankrate.com's corrections policy
Print   E-mail

30 yr fixed mtg 4.06%
48 month new car loan 3.21%
1 yr CD 0.66%
Alerts


Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS

BASICS SERIES
Begin with personal finance fundamentals:
Auto Loans
Checking
Credit Cards
Debt Consolidation
Insurance
Investing
Home Equity
Mortgages
Student Loans
Taxes
Retirement

MORE ON BANKRATE
Ask the experts  
Frugal $ense contest  
Quizzes  
Form Letters


- advertisement -
 
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here.

Bankrate.com ®, Copyright © 2014 Bankrate, Inc., All Rights Reserved, Terms of Use.