How Much House Can You Afford?
Debt-to-Income Ratios
Lenders determine your maximum mortgage amount by using guidelines called debt to income ratios. This is simply the percentage of your monthly gross income (before taxes) used to pay your monthly debts. Because there are two calculations, there is a "front" ratio and a "back" ratio and they are commonly written in the format: 33/38.
The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt (car payments, credit card debt, installment loans) etc.
A usual guideline for debt to income ratios is 33/38. A borrower's housing costs should be thirty three percent of their monthly income. If you add the monthly consumer debt to the housing costs, it must take no more than thirty-eight percent of their monthly income to meet those obligations.
Guidelines are just guidelines and they are flexible. If you make a small down payment, the guidelines are very rigid. Marginal credit, the guidelines are more rigid. If you make a larger down payment or have sterling credit, the guidelines are easier.
