HOW MUCH HOME CAN YOU AFFORD?

It depends on . . .

 How much money you make
 How much money you have for down payment and closing costs, and
 How much debt you have

 Although the criteria for these vary depending on your total financial picture, there are some general guidelines lenders use to determine how much money they will loan a borrower.

 Lenders evaluate your potential to repay the loan using qualifying ratios.  They calculate a “front-end” ratio and a “back-end” ratio based on your monthly income.  The front-end ratio refers to how much of your monthly gross income you spend on housing, while the back-end ratio depicts how much of your monthly gross income you spend on all debts. The strictest ratios are 28/36 (that is, 28% front and 36% back). The most liberal are 41/48 (that is, 41% front and 48% back).

 The front-end ratio, i.e. your total monthly housing payment, is often referred to as PITI.  PITI is principal and interest payment on your mortgage, real estate taxes on the property and homeowner’s insurance, plus any private mortgage insurance (if you put less than 20% down), and any homeowners/condominium fee.

 The back-end ratio, i.e. your total debt, includes the total housing payment plus any long-term debt (remaining payments greater than 6 to 8 months) you have, such as school or car loans, credit card balances, lines of credit, etc.

 The ratios used and the loan amount you are able to borrow depend on compensating factors taken into account by the lender. The lender considers your stability, ability, investment, willingness, and collateral.  In the 1990’s, “FICO credit scores” began to heavily impact home mortgage borrowers as lenders consider this score among the factors. This score is derived in part from your past credit history as it is measured against a database of habits in the general borrowing population.

 Once the loan amount is determined, the down payment is added and this equals the maximum sales price available to you. Only you can decide if you feel comfortable with the monthly amount!

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