Mortgage Basics
mortgage
How much house can you buy?

Example

The following chart shows your maximum monthly payment and maximum allowable debt load based on your gross annual income (remember, gross income is pretax income):

Debt-to-income ratio examples

Gross income28% of monthly36% of monthly
$20,000$467$600
$30,000$700$900
$40,000$933$1,200
$50,000$1,167$1,500
$60,000$1,400$1,800
$80,000$1,867$2,400
$100,000$2,333$3,000
$150,000$3,500$4,500

Here's a look at typical debt ratio requirements by loan type:

  • Conventional loans:
    Housing costs: 26 percent to 28 percent of monthly gross income.
    Housing plus debt costs: 33 percent to 36 percent of monthly gross income.
  • FHA loans:
    Housing costs: 29 percent of monthly gross income.
    Housing plus debt costs: 41 percent of monthly gross income.

Taxes and insurance

In addition, lenders include the cost of taxes and insurance when calculating how much house you can afford:

  • 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 an insurance agent or insurance company. 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 mortgage insurance or take out a second loan, called a piggyback loan, to bring the first mortgage down to 80 percent of the purchase price. Both alternatives will raise your monthly payment.

Calculator

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

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