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LESSON 13: HOW MUCH HOUSE CAN YOU AFFORD?
Now you know the basic things lenders look at on a
loan application. But before we go any further, we should talk more
about how to determine how much house you can afford.
Experts say most borrowers spend about a third of their incomes
on home loans.
As
we touched upon in the last lesson, lenders don't want too much
of their borrowers' paychecks going toward debt service. To figure
out if a customer owes too much, a lender will compute two debt-to-income
ratios:
The housing
expense, or front-end, ratio: This shows how much of
your gross
(pretax) monthly income would go toward the mortgage payment
if you were approved. Lenders consider the entire payment, including
any real estate tax and homeowner's insurance charges, rather than
just the principal and interest payment. As a general guideline,
housing payments shouldn't take up more than 28 percent of a borrower's
income.
Total debt-to-income,
or back-end, ratio: This shows how much of your income would
go toward all debt obligations, including the mortgage, car loans,
child support and alimony, credit card bills, student loans and
condominium association fees. Generally speaking, your total monthly
debt payments should not take up more than 36 percent of your gross
income.
 Let's
take a home buyer who makes $40,000 a year. The maximum amount
of money available for a monthly mortgage payment, given a 28
percent of gross income cap, would be $933. The maximum amount
available for all debt payments, given a 36 percent cap, would
be $1,200. The following chart will help you see where you fit
in: |
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Gross income
|
28% of monthly
|
36% of monthly
|
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$20,000
|
$467
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$600
|
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$30,000
|
$700
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$900
|
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$40,000
|
$933
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$1,200
|
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$50,000
|
$1,167
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$1,500
|
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$60,000
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$1,400
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$1,800
|
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$80,000
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$1,867
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$2,400
|
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$100,000
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$2,333
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$3,000
|
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$150,000
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$3,500
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$4,500
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(continued on next page)
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