Business Magazine

Can I Afford This House?

By Homesmsp @HomesMSP

One of the questions homebuyers will ask me is how much can I afford?  I usually will ask them, "what are you comfortable with in a house payment?".  Everyone is different and the technical answer is based on debt to income ratios, but the real answer depends on your situation.

Housing ratios are simple - the front ratio (the house payment) is typically between 28 and 33% of your gross income.  The house payment is made up of prinicpal, interest, taxes and insurance.  If you have association dues or mortgage insurance, you need to add those to the payment. 

The back ratio is more important.  That ratio is made up of your house payment (PITI, plus mortgage insurance and association dues if they apply) and all your other debt - car payments, minimum credit card payments, child support or alimony payments, any installment debt.  That ratio should be about 41% of your gross income.  Sometimes you can go higher than that, but lenders like to see a max ratio of 45%.  Sometimes you may have compensating factors that will allow a higher debt to income ratio.

The reality is how much you can afford depends on your life style.  Some people are very conservative and will not want to spend any where near 40-45% of their income on a debt payments.  Others feel they can easily live with a higher house payment.  Sometimes you have income that we can't include and so you may be able to afford a higher payment.  Maybe you know you will need a new car in the near future, so you will want to take that payment into consideration when you buy a home.

Back to Featured Articles on Logo Paperblog