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How Much House Can I Afford?

By
Real Estate Agent with Realty Exchange

How Much House Can I Afford?

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."

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.

Example
Take a home buyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income would be $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.)

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.)

Example
The following chart shows your maximum monthly payment and maximum allowable debt load based on your gross annual income (remember, gross income is pre-tax 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

 

Comments (2)

Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate
Hi Shelby:  Your post is great, but... if your buyer has decent credit... perhaps 640 or better, the lender will allow higher ratios than the ones you have listed above.  It is not uncommon for a lender to allow a payment ration of from 30% to 33% or even higher, especially if the buyer's debts are minimal.  Hope this helps.  Take care...
Jan 13, 2008 05:50 PM
Shelby Morris
Realty Exchange - Columbia, TN

Hi, Karen.  In all hensty, I have seen that ratio go as high as 50-60%.  I always tell my clients that just because they got financed for it, doesn't mean they can afford it.  It is their decision but I discourage it.  I don't want someone I get into a house to end up losing that house.  So far, that has never happened and that is a statistic I want to keep.  Good luck out there!  I wish you much success in 2008!

Jan 14, 2008 12:13 AM