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):
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Debt-to-income ratio examples |
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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 |
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