If you are buying a home in Los Angeles, especially if you are a first-time home buyer, you probably have a ton of questions. I am not going to be able to cover them all, but hopefully this series will answer the main ones.
Q: What can I afford?
A: The first step you will want to take is to consult with a lender. They will determine if and what you can afford to buy. This will be based on:
- Your gross income
- Available cash for downpayment, closing costs, and lender-required reserves
- Outstanding debts
- Credit history
- Mortgage type
- Interest rates
Also taken into consideration is your debt-to-income ratio, also known as front-end and back-end ratios.
The front-end ratio standard is around 28% and factors in how much of your gross income will go towards your mortgage payments. These payments include principle, interest, taxes and insurance (PITI). Simply put, if you are earning $100,000 a year, your monthly payments should not be more than $2,333 a month.
The back-end ratio is your total debt-to-income ratio, i.e. all your debts, including credit cards, monthly homeowners dues (if applicable), car payments, loans, etc. This should not exceed 36% of your gross income. In this case, based on your $100K salary, not more than $3,000 per month.
This is a simplified explanation of a lender’ requirements, but will give you an idea of what to expect. For a more in-depth explanation you will need to contact a qualified mortgage lender.
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