By: Megan Bohannan
Needs vs. Wants
With current underwriting policies in effect, banks will qualify you for as much as they possibly can. However, just because the money is available to you doesn't mean that it's wise to take it. Manage your desires by prioritizing your needs over your wants to ensure that you're making the startest mortgage decision possible.
Multiply by 2.5
One basic rule of thumb when calculating what you can afford is to multiply your annual income By 2.5 or 3. For example, a person who makes $100,000 a year should be able to afford a home within the purchase range of $250,000 and $300,000. Keep in mind that this is very general, and the outcomes can be affected by other variables such as your interest rate.
When banks evaluate your home loan application, one particularly important calculation they will look at is called your front-end ratio. This is found by taking your projected housing expenses for the home you want and dividing that by your total monthly income. Typically, mortgage companies are looking for a Front-End Ratio that is 28% or less. However, others may consider a borrower for a slightly higher ratio. This depends on the applicant, the financial rating, and other individual factors.
Another essential calculation to keep in mind is the Back-End Ratio. This is found by taking your total monthly minimum debt payments and dividing them by your gross income. Along with the front-end ratio, this formula is used by borrowers to give them a realistic idea of your financial position. Bankers usually look for a back-end ratio of no more than 36%, which may vary depending on your provider.