To know how much house you can afford, you should understand your debt-to-income ratio.
The standard debt-to-income ratios are the housing expense, or front-end ratio and the total debt-to-income, or back-end ratio.
Debt-to-income ratios
Front-end ratio
The housing expense, or front-end ratio, shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing expense, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense.
Annual salary x 0.28
= Monthly housing expense
12 months
Back-end ratio
The total debt-to-income, or back-end
ratio, shows how much of your gross
income would go toward all of your
debt obligations, including mortgage,
car loans, child support and alimony,
credit card bills, student loans,
and condominium fees. In general,
your total monthly debt obligation
should not exceed 36 percent of
your gross income. To calculate
your debt-to-income ratio, multiply
your annual salary by 0.36, then
divide by 12 (months). The answer
is your maximum allowable debt-to-income
ratio.
Annual salary x 0.36
= Monthly allowable debt-to-income ratio
12 months
Debt-to-income ratio examples
Gross income
28% of monthly
36% 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
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.
