There are a few things to consider when purchasing a home. Your household income, your current debt, and your personal budget should be at the top of this list when trying to find out what you are comfortable affording. Once you buy a home not only do you have a mortgage payment, but you also have property taxes, homeowners insurance, home owners association dues and mortgage insurance if applicable along with maintenance such as lawn care and repairs. Also home ownership means electric bills, gas bills, water bills, etc. This article is designed to give you a formula to not over extend yourself.
Most lenders will allow you to go up to 45% back end debt to income ratio. A back end ratio is your current debt that shows up on your credit report plus a housing expense to include principle, interest, taxes, insurances, and HOA dues. If your household income is $5,000 per month, the most you can qualify for is total expenses of $2250 per month. The other 55% is reserved for daily living expenses such as utilities and groceries.
If you currently have an automobile payment of $320 and credit card minimum payments of $400 along with a student loan that is $100 per month you would subtract this from your $2250 allowable for your back end ratio. This would leave you with $1430 per month for a housing expense. Now you would need to factor in the taxes, insurance, etc. Let’s use a common tax factor in Texas of 2.5% and let’s estimate homeowners insurance at $100 per month, mortgage insurance at $150 per month and HOA dues at $40 per month. On a $150,000 home your payment would be approx $800 per month for principle and interest. After taxes and insurance your total estimated payment would be $1402.50 per month. This would make your front end ratio 16% and your back end ratio 44%. You wouldn’t want to go much higher than and most lenders won’t allow it on conventional loans. Government loans such as FHA loans will allow for a higher debt to income ratio in some cases.
When purchasing a home keep this simple formula in mind. Monthly income multiplied by 45%. Then subtract your current debt on your credit report and the number you have is your total available for a housing expense. This doesn’t mean you need to max out your total available. Just keep in mind what you and your family are comfortable with and let your Realtor and Mortgage Lender know those numbers up front. The last thing you want to do it end up in a dream home you can’t afford or a dream home that causes you to make too many sacrifices in life. A home is a dwelling meant to provide shelter and a place to raise a family, nothing more nothing less. Once you make your decision and are pre-qualified through a lender present your real estate agent with your pre qualification letter and happy hunting.