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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

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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.

Bankrate.com's corrections policy
-- Posted: Sept. 15, 2005
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