So if you are a first time homebuyer you may find yourself thinking “How much home can I afford?”
DEBT TO INCOME RATIO
The first thing to do is add up all your monthly income before taxes. A $60,000 year salary would equal $5000/month. Next you add up the minimum payments on all debt that is on your credit report. This would include car payments, credit cards, revolving loans, student loan payments but not money you have borrowed from a family or friend. If you would prefer to be conservative, then instead of minimum payments you can use a higher payment amount. So back to our example: Let’s say you have a car payment of $250, a credit card payment of $100 and student loan of $100. This would give you a total monthly debt of $450. Subtract this from your income and then multiply by 40% (the responsible amount of income as seen by lenders to be spent on housing).
$5000 – $450 = $4550 x 40% = $1820
This is why many lenders will encourage you to pay down your debt before applying for a loan. Let’s say you were able to pay off the credit card and car payment then your allowable mortgage payment would now look like:
$5000 – $100 = $4900 x 40% = $1960
We will get into the other monthly mortgage costs in Part 2, but to give you an idea of what you can afford, here is a fairly typical break down:
$400,000 house price
$80,000 20% down payment
4.25% interest rate
30 year loan term
$1,574 monthly mortgage payment
$150 monthly taxes
$100 monthly homeowners insurance
$1,824 total monthly payment
Check out this great mortgage calculator using todays interest rates.