Calculating How Much Home You Can Afford

Once you make the decision to purchase a home, the next big decision you need to make involves determining how much you can actually afford. By making these calculations early, you’ll know just which houses are within your price range so you can focus your search on those that you’ll be able to afford.

A number of factors go into determining how much you can afford to pay for your new home. Your debt-to-income ratio is one important factor. There are two different types of debt-to-ratios to consider, these are the front-end ratio and back-end ratio.

The front-end ratio is the housing expense and is calculated by multiplying your annual salary times 0.28 and then dividing by 12. The 0.28 comes from the fact that your total monthly house payment, which includes your mortgage payment, interest, taxes, and insurance, should not exceed 28%. The 12 represents the total number of months per year.

The back-end ratio is a bit different in that this shows how much of your income will go toward all of your debt obligations. These obligations include your mortgage, child support, alimony, car loans, student loans, credit card bills, and condominium fees. Your total debt obligation should not be any more than 36% of your gross income. In order to calculate this figure, therefore, you need to multiply your salary times 0.36 and divide the answer by 12. This figure represents you maximum debt-to-income ratio.

Of course, these are just general guidelines for you to follow when determining how much you can comfortably afford to spend in mortgage payments. Whether or not the lending institution is willing to give you a loan in this amount is another consideration completely. The lending institution will look at a number of factors to determine your loan worthiness, including your credit and job history.