Shopping for a home can be an exciting time in one’s life. There are so many things to consider. How many rooms, how many bathrooms, the neighborhood, and the school district all are primary considerations. However, the most important consideration most likely will be, how much house can I afford? The general rule of thumb is that most homeowners can afford a mortgage loan that is 2-2.5 times their gross income. This means a family with a household income of $100,000 could probably afford a $200,000-$250,000 home mortgage. Of course, this is a generalization. There are other factors to take into consideration.
When lenders are considering potential buyers, they look at more than just their gross income. They also look very closely at the buyer’s front-end and back-end ratios, as well as the amount of the down payment they can afford. We will take a closer look at what these factors are and why they are important.
1. Front-end ratio: The front-end ratio is the percentage of ones’ gross income that will go towards the monthly mortgage payment. The mortgage consists of principal, interest, taxes, and insurance. Most lenders don’t want to see the front-end ratio higher than 28%. This means that the total mortgage payment should not exceed 28% of one's monthly income.
2. Back-end ratio: The back-end ratio is the percentage of ones’ gross income that is required to cover debts. This includes the mortgage, credit card payments, child support, student loans, and the like. Most mortgage companies like to see this ratio stay below 36% of ones’ gross income. However, there are some that will push this limit to just over 40%.
3. Down payment: Lenders would like to see a down payment of at least 20%. I would suggest at least 30%. A down payment of this amount will allow the buyer to skip paying expensive private mortgage insurance, which can run anywhere between $50 and $125 or more, depending on how much mortgage one will be carrying.
Purchasing a home can be a very satisfying experience. It is a life-long dream for many and a great accomplishment. However, it can also be expensive, so your total financial situation must be taken into consideration. You must not only consider your income, but also expenses, debt, lifestyle, and personality. Only after these things are carefully and completely considered will you be ready to purchase a home.
If you are having a hard time qualifying for a mortgage, check in with a local Financial Coach. They can help you work on getting your debt-loads under control to meet the back-end ratio, and help you save enough for a solid down payment to eliminate the Private Mortgage Insurance and reduce your front-end ratio.
You can do this!