The 36% RuleĮven if your housing-expense-to-income ratio is 28% or less, you still have one more hurdle to clear: the debt-to-income ratio.Īlso referred to as the back-end ratio, this takes into account your total monthly minimum debt payments and then divides them by your gross income. Resource: 11 Home-Buying Programs for Low-Income Families 3.
Again, it all depends on the lender, your credit history, and other individual factors. While the 28% mortgage-to-income ratio is followed by many institutions, some will qualify borrowers with a slightly higher ratio. This means that your mortgage payment (principal and interest), property taxes, PMI (if required), and homeowner’s insurance all need to stay below this threshold. Judging by this, most banks would qualify you for a loan (subject to other factors, of course), so long as your total housing expenses do not exceed $2,800 each month. Generally, mortgage companies are looking for a ratio of 28% or less.įor example, let’s say that your income is $10,000 a month. This is known as your housing-expense-to-income ratio.Īlso called the front-end ratio, banks will take your projected housing expenses for the home you want to buy and divide them by your total monthly income. When banks evaluate your home loan application, they will look at one very important calculation in particular. I think that for most situations, a good starting point is 2.5 times your income. I’ve seen banks recommend ratios as low as 1.5 times your salary or as high as five times your salary. And keep in mind that you do need a credit score of about 620 or higher to qualify for a mortgage.Īlso, keep in mind that others may suggest using higher or lower multiples to determine your ideal home purchase price.
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If you don’t know your credit score, you can get your FICO score for free from one of several credit scoring companies. A 1.5% lower rate can easily translate into savings of tens of thousands of dollars over the life of a mortgage. A good credit score of 760 or higher could net you an interest rate that is 1.5% lower than if you had a fair score of, say, 620. This is one reason why your credit score is so important. For example, the lower the interest rate you can obtain, the higher the home value you can afford on the same income. Keep in mind that this is a very general rule of thumb, and several factors will influence the results. For somebody making $100,000 a year, the maximum purchase price of a new home should be somewhere between $250,000 and $300,000. Simply take your gross income and multiply it by 2.5 or 3 to get the maximum value of the home you can afford. This was the basic rule of thumb for many years. Let’s look at five ways to calculate how much house you can afford, beginning with a standard rule of thumb. This is where you need to rein in your wants to make a smart mortgage decision. But just because the money is available doesn’t mean you should take it. The second perspective is a bit more subjective: how much home do you really need? Just because you can qualify for a mortgage doesn’t mean that you should.īanks will qualify you for as much as possible, given their existing underwriting policies. That way, you can narrow this answer down a bit before you even begin the application process.) (In a moment, we’ll look at several calculations that most lenders use to evaluate mortgage applicants. Some of these factors include your income, existing debts, interest rates, credit history, and credit score. The answer to this question depends on a number of factors. The first is simply how big of a mortgage will you qualify for. It’s very important to think of this question from two different perspectives, though. This will tell you the dollar amount you need to stay below to make a financially wise home-buying decision. If you’re considering buying a home, it helps to know how much you can afford. Luckily, we have a few tips for calculating your own mortgage sweet spot. Ensuring that you can not only qualify for a certain level of mortgage but then continue making those payments for as many as 30 years is a tall order. It makes sense, too, as this is a pretty significant concern. “How much house can I afford?” is likely at the top of that list. If you’re looking to buy a new home – particularly if it’s your first home – you’re probably asking yourself a few big questions. This content has not been provided by, reviewed, approved or endorsed by any advertiser, unless otherwise noted below. We may receive compensation from the providers of some products mentioned in this article.
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