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How much house can you afford?
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Before you start looking for a new home it's always a good idea to determine how much home you can afford. The process for determining this can seem complicated but it's fairly basic.
Mortgage lending guidelines work off of two different ratios, a front ratio & a back ratio.
The front ratio = estimated new house payment (PITI) divided by your total gross income.
The back ratio = estimated new house payment (PITI) + all other reported debt divided by total gross income.
If your wanting to understand the math behind how lenders calculate your debt ratios read on... If your just wanting to calculate your affordability download my free app!
The maximum front or back ratio can vary depending on which type of loan you decide to go with. HUD backed loans like FHA or VA typically are a little more liberal and Conforming or USDA are a little more strict. Typically underwriters prefer to see your front ratio equal to about 1/3rd of your income and back ratio no higher than 41%-45%.
To determine your front ratio
This indicates the maximum monthly payment you can qualify for based on current income not factoring in debt
Your Gross Monthly Income(s) =
$ ? ? ? ? ?
multiplied by .33% =
$ ? ? ? ? ?
Example - bef0re tax income - $9,000 per month x .33% = $3,000 per month (typical maximum monthly new mortgage payment)
While the front ratio is an important factor to consider, many loan programs will allow you to exceed this ratio based on compensating factors. We'll always review this to see if the automated underwriting system provides you an exception to be qualified for a higher amount.
Remember: Just because your front ratio is ok, if your back ratio is high then your qualification amount will have to be reduced.
To determine your back ratio:
This indicates the maximum monthly payment you can qualify for based on current debt obligations
Estimated new house payment =
Your monthly debt obligations = +
$ ? ? ? ? ?
$ ? ? ? ? ?
$ ? ? ? ? ?
New house PITI + Debt =
Monthly debt obligations will include all debts reported to credit, loan payments, child support, un-reimbursed business expenses, etc.
Utility payments such as water, electric, cell, childcare, etc do not need to be included.
%
Divide total debt by income to calculate your back ratio
Total Debt
Example - Estimated new house payment $3000 per month + $750 per month in debt obligations = $3750 in total estimated debt.
Divide monthly debt - $3750 by monthly income - $9000 = 41.6% which should qualify in most cases.
Estimated house payments must include PITI (principal, interest, taxes and insurance) and if required the monthly HOA fees associated to the home as well.
Only reported debts are included in your overall debt ratio such as revolving credit cards, auto, student loans, personal loans, alimony, child support, etc. Unreported debts such as utilities, day care, insurance, phone, fitness membership, etc are not considered in the calculation of your mortgage ratios.
Estimate your new house payment here:
The above calculations are typical but may not apply to your specific loan type or situation. Many factors are considered to determine maximum debt ratios which include credit score, work history, available reserves, etc. Your situation could allow you to exceed these ratios and in some cases these ratios may need to be reduced to provide loan qualification. You should always talk to a mortgage professional to determine your available options. The above examples are provided as a broad overview and basic functions of housing debt ratios and are not meant to represent an approval or qualified amount.