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How much home you can realistically afford?
Dated: November 18 2019
Finding a dream house that you can reasonably afford.
If you do this: Assess Your Ratios (Finding that magic mortgage number of how much home you can realistically afford.)
A front-end ratio is also known as the mortgage-to-income ratio. You can find this ratio by using a debt to income calculator or simply by dividing your projected monthly mortgage payments by your gross monthly income.
For example, if your monthly mortgage payment would be $1,500 and your monthly income is $6,000, your front-end ratio would be 1500/6000 or 25%.
This projected mortgage payment should include the principal, taxes, insurance, and interest payments. Many lenders have limits on the maximum front-end ratio that they’ll permit. If you’re seeking an FHA loan, the federal cap on front-end ratios is a 31% percent limit.
Your debt-to-income ratio is your back-end ratio. The back-end ratio can be found by adding all of your monthly debt payments, including your car payments, credit card payments and any other outstanding debt, then dividing this number by your gross monthly income, which is the amount earned before taxes or other deductions.T
he higher your back-end ratio is, the more difficult it is to meet your monthly mortgage payments. Lenders will also have maximum caps on this. The absolute highest back-end ratio you can have and still qualify for an FHA mortgage is 43%.
Pause and reflect on whether or not you should borrow as much as you qualify for.
- Consider your own ratios, Front-End or Back-End?
- Do you want to allocate money elsewhere besides your mortgage?
- What percentage of your income do you feel comfortable spending on your mortgage?
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