# Home Affordability Calculator

Unsure how much you can afford to spend on a house? Use this calculator to figure home loan affordability from the lender's point of view.

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## Find Affordable Housing

Buying a home can be expensive. The U.S. Census Bureau stated that the average price of a home in the United States was \$272,900 in 2010, the last year for which the data was available. If you live in large metropolitan areas like New York or Los Angeles, you can expect to pay even more.

However, understanding whether you can afford to buy a home depends on much more than just the selling price. Unless you've spent the last several years socking away everything you've earned, or you've come into a large inheritance or won some money, chances are good that you'll need to get a loan to pay for your home.

Bloomberg News reported that the current interest rate for 30-year fixed mortgage, as of Nov. 29, 2013, is 4.38 percent. With that interest on an average-priced home of \$272,900, you would end up paying \$217,907.58 in interest, for a total of \$490,807.58 over the life of the loan.

Of course, interest rates can fluctuate based on market conditions, as well as your own personal financial information, such as your credit score, debt-to-income ratio, and the size of your down payment.

### Determining How Much You Can Afford

When mortgage lenders evaluate your ability to afford a loan, they consider all the factors in the loan, such as the interest rate, private mortgage insurance and homeowner's insurance. They also consider your own financial profile, including how the monthly mortgage payment will add to your overall debt and how much income you are expected to make while you are paying for the home.

#### Front-End Ratio vs Back-End Ratio

Two criteria that mortgage lenders look at to understand how much you can afford are the housing expense ratio, known as the “front-end ratio,” and the total debt-to-income ratio, known as the “back-end ratio.”

#### Front-End Ratio

The housing expense, or front-end, ratio is determined by the amount of your gross income used to pay your monthly mortgage payment. Most lenders do not want your monthly mortgage payment to exceed 28 percent of your gross monthly income. The monthly mortgage payment includes principle, interest, property taxes, homeowner's insurance and any other fees that must be included.

To determine how much you can afford for your monthly mortgage payment, just multiply your annual salary by 0.28 and divide the total by 12. This will give you the monthly payment that you can afford.

#### Back-End Ratio

The debt-to-income, or back-end, ratio, analyzes how much of your gross income must go toward debt payments, including your mortgage, credit cards, car loans student loans, medical expenses, child support, alimony and other obligations. Most lenders do not want your total debts, including your mortgage, to be more than 36 percent of your gross monthly income.

Determining your monthly mortgage payment based on your other debts is a bit more completed. Multiply your annual salary by 0.36 percent, then divide the total by 12. This is the maximum amount you can pay toward debts each month. Subtract your other debts — including your car payment, your student loan payment and other debt payments — from this amount to determine the maximum amount you can spend on your monthly mortgage payment.

Once you have the two numbers and a sense of the interest rate you may qualify for, you can use a mortgage calculator to determine the cost of the home that you can afford.

The above calculator gives you all the answers you need in one stop — determining your front- and back-end ratios and compares it to the interest rate on the loan and the length of the loan. You can also enter information about the annual taxes and insurance on the home. You'll get a clear picture of just how much home you can afford in moments, with the results e-mailed to you in a plain-English and easy-to-understand format. Just enter your e-mail, and you'll have the information you need in moments!

### Renting or Buying?

Of course being able to buy something does not mean that one necessarily should. Owning a home is both a significant commitment and a serious lifestyle choice. Here are some other factors to consider beyond the above financial ratios.

• Do you plan on living in the area for an extended period of time? Real estate transactions are typically large, leveraged, high-friction transactions. Between closing costs, real estate commissions & other related fees, many home buyers may spend about eight or nine percent of the home's price between buying and selling it. If you live in a place for a significant period of time the home appreciation can more than offset any costs, but if you only live there a couple years before moving again it is likely to cost you as the first few years of a loan's payments go primarily toward interest.
• How secure is your source of income? If your job may require you to move then owning a home may harm your career flexibility. If you are in a field with high employee churn then renting may be a better option.
• Will you be adding to your family in the near future? If you buy a house & quickly outgrow it, there's no guarantee that it will be easy to simulaneously sell your current home and buy a larger one.
• What are the local market conditions? Some markets like Phoenix or Las Vegas may be cheap to buy in, other markets like San Francisco and New York City are typically priced well above equivalent rent payments.

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