How much home can I afford?

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Of course, everyone has their own personal budgets for how much they can afford on housing. We are sharing information from a loan qualifying perspective. Lenders have qualifying limitations. They’re referred as a front end and back end ratios.

A front-end ratio is calculated by taking monthly gross income. This is pay before taxes. If you are an hourly employee, it will be based upon the last year’s average hours. That’s if you are not full time. If you are salary, it would be 1/12^th of your annual income. For those who are commission based, 1099 or self-employed they would average your last two years income, generally. Bonuses can be used in some cases, but can have limitations.

An Example

A household income has $75,000 (that can a combined salary of 1, 2 or multiple people in the home). For $75,000, majority of lenders look for the mortgage payment, plus property taxes, plus homeowner’s insurance, plus HOA not to exceed 30-32% of your month gross income. For a household income of $75,000 that would equal a $1,885 to $2,000.

The second ratio lenders look at is you back end ratio. This is determined by taking all your debts in monthly payments such as credit cards, student loans, car payments and medical payments. Combine this amount with monthly mortgage and that amount general needs to fall between 45% and 55% of your gross income. This figure ranges a lot based upon your credit score, your cash reserves and other lenders requirements.

To determine you monthly mortgage rate, you can use our mortgage calculator. The key is the interest rate that would best meet your financial position. The best market rate is usually available at most major banks without having to provide your personal information. Beware this is the rate for top credit scores, usually above 760, solid employment, and 20% down. If that is not you, then adjust the rate up by 0.25% if your credit score is 720 to 760, or 0.5% for 680 to 720 or 1% 620-ish to 680. This is just a guideline all lenders have their own internal calculation… credit is just one of the qualifying factors. Let the Graham Team be a resource to you as you prepare for a successful game plan for your home purchase!