How much house can you afford to buy? This is a good question, and one that mortgage lenders seek to answer before qualifying you for a mortgage. To get an answer, you might apply some formulas lenders use, like the front-end and back-end ratios. The front-end ratio addresses your ability to afford mortgage payments, while the back-end ratio addresses your debt load. Let's look at an example:
Imagine that your gross income is $4,000 per month, and you owe $1,000 per month in debt -- perhaps for your car, student loans, and some credit card debt.
Lenders will typically want you to spend no more than 29% or 30% of your income on your mortgage. This is the front-end ratio. In this example, 29% of $4,000 is roughly $1,200, so a lender might assume that you can reasonably handle as much as $1,200 per month in mortgage payments.
Meanwhile, your debt payment-to-income ratio is $1,000 divided by $4,000, or 25%. Lenders will balk if much more than 40% of your income is going toward debt.
Once you know how much you can afford for a down payment and how much you can pay each month, you just need to plug them into a formula. You can figure much of this out in this article in our Home Center.
Or drop by our Buying or Selling a Home discussion board.
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