No single rule of thumb applies to all consumers when it comes to affording a home. Key factors in determining affordability include the buyer's income, existing debt and credit rating. Lenders suggest that a borrower's total debt payments, including the new mortgage, should not exceed 36% of their gross income. But that doesn't mean a consumer ought to buy a home right up to the full amount of their financial eligibility. That's how you get a bloody thumb.
Lenders, mortgage loan websites, and home-finder organizations offer free mortgage payment calculators for visitors to determine how much house they can afford. Use them. But more importantly, recognize the factors that lenders consider for determining affordability – and calculate a ceiling price based on retaining a prudent savings reserve and margin for changes in life and the economy. A buffer can make all the difference between defaulting or in hanging on to your home. Things break down and need repairs, kids go to college or get married, employers downsize companies. The following elements are common to online affordability calculators and borrowers should get to know them:
Debt-to-Income Ratio (DTI)
Lenders will examine how much of the borrowers total income is dedicated to paying existing car loans, revolving credit, alimony/child support, student loans, and payments on other property. The DTI is calculated by dividing the minimum required debt payments by gross income and represented as a percentage. The rule of thumb may be 36%, but other products like FHA loans may accept a DTI as high as 41%. An online mortgagbe payment caculator can run the numbers on yhour DTI.
Front-end Ratio/Back-end Ratio
The front-end DTI is expressed as the percentage of gross income dedicated to the new principal, interest, insurance and taxes. The rule of thumb here is no more than 28%. The back-end DTI combines existing debt and the new mortgage payments into a monthly maximum percentage of untaxed income. The ceiling here is around 36%. Remember, not all rules of thumb apply to all borrowers because lenders weigh other factors.
Down Payment Amount
Borrowers truly need to examine their fitness for required down payments given their financial well-being. The advantage is with a higher down payment, borrowers will see a reduction in interest, giving them more house for the money. Not all lenders or mortgages require the common 20-percent down payment. FHA and VA lenders typically offer the best mortgage support when it comes to down payments.
Consumers with FICO scores of at least 740 can find the better interest rates. Ultimately a low score can price the consumer out of the "affordable" home. The difference can be from 3.052% paid in the top tier to 4.641% levied for scores in the 620-639 range.
Remember, for many there may be requirements that directly affect affordability in addition to those already cited. Borrowers may have to pay for private mortgage insurance, homeowners insurance, property taxes, homeowners' association dues, and for unexpected home repairs and upgrades. When calculating affordability, it's crucial to plan for exigencies. Crunch the numbers. Dream all you want, but keep your feet on the ground.