|
Mortgage standards say you will typically spend about a
third of your income on financing your home. Before you start to look for
your dream home, you should figure out just how much
afford.
Mortgage lenders look at your ability to repay the mortgage loan by
reviewing:
- Your monthly gross income
- How much cash you can accumulate for a down payment, which is usually
10 percent to 20 percent of the sale price.
They look at your willingness to repay by looking at
your credit history.
General Guidelines
You can see how much house you can afford by following a few
general guidelines:
- Your monthly mortgage payment -- including principal, interest, real
estate taxes and homeowners insurance -- should not be more than 28
percent of your gross monthly income (before taxes). This is your housing
expense ratio.
- Your total monthly debt obligation should not be more than 36 percent
of your gross income. Total debt includes the mortgage payment plus other
obligations such as car loans, credit card bills,
child support and alimony, student loans This is your debt-to-income
ratio.
- Government loans and certain other lenders
may be more use a different method of computing, but
these % are usually close on those types of loans also. Some loan
programs may be more lenient, but many also carry slightly higher costs
and/or MI.
Examples
A homebuyer who makes $45,000 a year. The maximum amount of money
available for a monthly mortgage payment at 28 percent of gross income would
be $1,050.
Then the lender looks at total payments each month should
not exceed 36 percent, which comes to $1,350.
This means that your combined debt should be less than
36%. If it is not, you can take the total debt that you have and
subtract it from the 36% of income calculation. What is left is
available for house payment, real estate taxes and homeowners
insurance.
In short, the less consumer debt you carry, the more
house payment you can qualify for. Some lender will allow ratios in
excess of 28% of housing if your total debt ratio is lower than 32%.
Typically acceptable debt ratios are shown in
the table below.
|
Annual Income |
Housing Debt*
28% of monthly |
Total Debt Including
Housing
36% of monthly |
Gross income
(before tax deductions) |
Gross x
.28 divided by 12 months |
Gross x
.36 divided by 12 months |
|
$20,000 |
$467 |
$600 |
|
$25,000 |
$583 |
$750 |
|
$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 |
|
$200,000 |
$4,665 |
$6,000 |
The amount shown is the amount to cover monthly
payments plus taxes, insurance and association fees and PMI if applicable.
Taxes and Insurance
There are other factors to weigh when deciding how much home
you can afford:
- Homeowner's insurance -- You must insure your property in order
to obtain a mortgage. You can get an estimate of insurance costs from your
insurance agent or a major insurance company in the area where you are
planning to purchase.
Some loan have special requirements for hazard
insurance, such as mandatory coverage earthquakes,
for floods, or windstorms. If your down payment
is less than 20 percent of your home's value, you
may also have to pay private mortgage
insurance (PMI). Hint: There are now
down payment assistance programs that are not based on income. If
you are close to 20% down you may be able to get a Down Payment Assistance
Grant to help you. These grants are also available for those needing
down payment assistance to qualify.
- Real estate taxes -- Most companies escrow
taxes as part of your monthly
mortgage payment. It is important to get an estimate of the property taxes
in your area. You can call the tax office in the
county where you are house
hunting and ask what is the local tax rate. Most
Cities also levy property tax also.
- Home Owner Association Fees -- These fees
can be for a variety of common costs in a neighborhood, condominium or
PUD. Ask you seller if these fees apply to the home the home you are
considering.
|