So How Much House Can You Afford?
Mortgage lenders are chiefly concerned with your ability to repay your mortgage in a timely manner. To determine if you qualify for a loan, and what type of mortgage loan, the lender will consider your credit history, gross verifiable income, other liabilities ( auto loans, credit card debt, child support, property taxes and insurance) and amount you have saved as down payment (which generally runs anywhere from 3 to 20 percent of the purchase price of the home).
You can easily calculate your maximum mortgage amount using two standard debt-to-income ratios (or D.T.I.):
- The Housing Debt-To-Income Ratio, or front-end D.T.I. ratio, shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income.
To calculate your maximum housing expense ratio – take your monthly income and multiply by .28.
- The Total Debt-to-Income Ratio, or back-end D.T.I. ratio, shows how much of your gross (pretax) monthly income would go toward all of your debt obligations that include: mortgage, property taxes, home insurance, car loans, child support, alimony, credit card bills, student loans, and condominium fees. In general, your total monthly debt obligation should not exceed 36 percent of your gross income.
To calculate your maximum allowable total debt-to-income ratio – take your monthly income and multiply by 0.36.
Mass Mortgage Buddy Example:
Let’s consider a home buyer who makes $40,000 a year.
The maximum amount available for a monthly mortgage payment (including taxes and insurance) at 28 percent of gross income would be $933. In addition, the total of all debt payments of any type each month should not exceed 36 percent, which comes to $1,200.
The following chart shows your maximum monthly mortgage payment and maximum allowable debt load based on your annual gross salary:
| Gross income | 28% of monthly | 36% of monthly |
| $20,000 | $467 | $600 |
| $30,000 | $700 | $900 |
| $40,000 | $933 | $1,200 |
| $50,000 | $1,167 | $1,500 |
| $60,000 | $1,400 | $1,400 |
| $80,000 | $1,867 | $2,400 |
| $100,000 | $2,333 | $3,000 |
| $150,000 | $3,500 | $4,500 |
Other Home Ownership Costs to Remember:
Lenders include the cost of real estate taxes, home owner’s insurance, any mortgage insurance such as PMI for conventional loans or MIP for FHA loans, and, also, condo fees when applicable are all taken into consideration when calculating how much house you can afford (your “Housing Debt-to-Income Ratio):
- Real Estate Taxes: Because property taxes are part of your monthly mortgage payment, it is important to know how much they are for the home you are interested in. Be sure to confirm this number with the city or town tax collector prior to putting in an offer.
- Homeowners insurance: You must also maintain insurance on your property in order to obtain a mortgage. You can get an estimate of insurance costs from your local insurance agent. Be sure to inquire about special requirements for hazard insurance, such as mandatory coverage for floods, earthquakes, or wind in coastal areas.
- Mortgage insurance: The monthly cost of mortgage insurance for conventional, FHA, & USDA, loans is something to remember when considering your monthly total mortgage cost. If you do not have 20% to put down as a down payment, in all likelihood you will be paying mortgage insurance.
- Condo fees: Don’t forget that all mortgage lenders count your condo fees in your debt-to-income ratios. Condo fees can be very expensive, so watch these closely, and again, confirm the amount.
Typical Debt-To-Income Ratio requirements by loan type:
- Conventional Fannie Mae & Freddie Mac Mortgage Loans:
Housing Debt-to-Income: 31-35% of monthly gross income
Total Debt-to-Income: 36-45% of monthly gross income - VA & USDA Loans: Housing Debt-to-Income: 31-35% of monthly gross income
Total Debt-to-Income: 41-45% of monthly gross income - FHA loans:
Housing Debt-to-Income: 31-35% of monthly gross income
Total Debt-to-Income: 41-45% of monthly gross income
Mass Mortgage Buddy Tip 1:
Please keep in mind these are just “guidelines”, not written in stone. Conventional loans Do NOT have much flexibility. Your home purchase or mortgage refinance is going to be capped out at a 45% Total D.T.I. Government backed mortgages such as FHA or VA loans can go as high as 50-55% D.T.I. with strong compensating factors.
Mass Mortgage Buddy Tip 2: Make 2 separate folders, a desktop folder on your computer and a paper folder that you will use throughout the process. Having easy access to all of your documents will make the pre-approval process easy.
