What Can I Afford?
What determines the price of the home you can afford?
Simple "Rules of Thumb"
CNN Money: “The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.”
Investopedia: “Generally speaking, most prospective homeowners can afford to mortgage property that costs between 2 and 2.5 times their gross income.”
Lender Criteria: Debt-to-Income Ratios
Front-End Ratio: “The front-end ratio is the percentage of your yearly gross income dedicated toward paying your mortgage each month. Your mortgage payment consists of four components: principal; interest; taxes; and insurance (often collectively referred to as PITI) ...” Investopedia. Some lenders say that PITI should not exceed 28% of your gross income. Others allow borrowers to exceed 30% or more.
Back-End Ratio: The back-end ratio or debt-to-income ratio (DTI) is used to determine the percentage of gross income needed to cover your debts. They include mortgage payments, credit card payments, child support and other loan payments. Typically the DTI it said that it should not exceed 36% of gross income
The way to know exactly what you can borrow and what the house can cost is to review your financial information with a lender or more than one lenders to determine the loan size that you can barrow. In this Pre-Approval process you will share the amount of your gross income, your existing debts and reoccurring payments. Other factors include:
- Your down payment and funds for closing costs
- Your credit history
- The type of loan that works best for you
- Current interest rates
Many loans require a down payment of 10% or more while other types of loans including government loans (FHA, VA and others) require much less.