People often ask us how they can learn how much house they can afford. Today I’ll show you how the math works so that you can make a plan to afford the home you truly want.
In mortgage terms, affordability depends on your debt-to-income ratio. To find that, we look at your gross income before taxes, what your monthly payments would be, and any other monthly obligations you have in terms of credit, such as car or student loan payments. Once we have all that information, we’ll turn it into a percentage.
There are actually two debt-to-income ratios that mortgage lenders use. Suppose you get $5,000 a month in gross income. To find your housing ratio (or front ratio), we’ll take your monthly house payment as a percentage of your income. To find your total debt-to-income ratio (or back-end ratio), we’ll consider all your debts as a percentage of your income.
In mortgage financing, you have to fit in certain parameters to determine your ability to pay for a home. Your front ratio needs to be about 45% of your gross income. If you make $5,000 a month, then 45% of that comes out to around $2,250, which is how much your loan program would determine you could handle as a monthly payment (not including your debts). That means your property taxes, homeowners insurance (if applicable), HOA fees, and so on would have to amount to $2,250 or less a month.
Your back-end ratio, on the other hand, can be between 50% and 55% of your income. With a $5,000-a-month gross income, that comes out to about $2,750. To bring that all together, suppose you have a $500 car payment, $200 student loan payment, and $100 in credit card minimums. Since your total debts equal $800, you’d subtract that from the $2,750, leaving you with $1,950 to put toward house payments.
Can you change your debt-to-income ratio? You can! There are a few different ways:
- Earn more money
- Bring on a co-signer
- Get your credit score as high as possible
We would love to look over your financial situation and help you navigate the complexities of loan programs and credit scores. Feel free to give us a call, shoot us a text, or send an email. One of our loan officers would love to connect with you.