Can You Afford to Buy a Home?

Mortgage rates and home prices are still near an all-time low. Home ownership has never been as affordable in our lifetimes as it is right now. But with the banks still recuperating from the collapse of the housing market, they are no longer taking all comers.

Mortgage lenders are chiefly concerned with your ability to repay the mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment. So how much house can you afford? To know that, you need to understand a concept called "debt-to-income ratios."

 

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Debt to Income Ratios

The standard debt-to-income ratios are the housing expense, or front-end, ratio; and the total debt-to-income, or back-end, ratio.

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 ratio, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense ratio.

Front-end ratio-
Maximum housing expense ratio = annual salary x 0.28 / 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.

Back-end ratio
Maximum allowable debt-to-income ratio = annual salary x 0.36 / 12 (months)
 
Example
Take a homebuyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income is $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.)

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 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

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.

Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200. ($40,000 times 0.36 equals $14,400, and $14,400 divided by 12 months equals $1,200.)

Now that you know how much house you can afford, the Southeastern Realty Group is ready to help you live the American dream of home ownership. Give us a call 404-850-7932 to get started. Or better yet, fill out the brief form below and a financial professional will call you to provide you with a FREE, no obligation consultation! 

Request a FREE Loan Consultation!
First Name *
Last Name *
Email *
Phone *

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Amy Ransdell
Southeastern Realty Group
Ph: 404-850-7932  -  Fax: 770-825-9031

Marietta, GA 30062
License # H-63735
www.southeasternhometeam.com

 

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