Your New Home. Can You Afford it?
Whether you're a first-time buyer looking for the perfect starter house, or a seasoned pro trading up to your waterfront dream home, you are probably asking the same questions: Can I afford this?
If you figure out that you can afford your projected budget, chances are you'll qualify for a mortgage in your range. Lenders will determine how much loan you can afford by using something called your debt-to-income ratio, which is the ratio of a borrower's total debt as a percentage of their total gross income. Basically, they will look at what's left in your budget after your monthly bills are paid. These include credit card payments, car payments, child support, etc.
- Housing ratio (or "front-end ratio"): Lenders want your total mortgage debt (called PITI — an acronym for Principal, Interest, Taxes, and Insurance) and condo fees to be no more than 30 percent of your gross monthly income; 28 percent is standard.
- Overall debt ratio (or "back-end ratio"): These are revolving monthly payments, such as credit card, car lease, or loan payments, student loans, child support, alimony, monthly utilities. (They do not include those lattes, but you might want to plug in your lifestyle expenses for your own sake.) The ratio should not be more than 36 percent.
Debt-to-income ratio standards differ from lender to lender, and vary based on your loan program, but most lenders will give more weight to your credit history as a factor in determining your particular situation. Here is a typical ratio for a first-time buyer:
