|Monthly Principal & Interests :||$1,449.42|
|Monthly Real Estate Taxes :||$250.00|
|Monthly Insurance :||$125.00|
|Loan To Value Ratio :||90.00%|
|Months With PMI :||78|
|Monthly PMI :||$112.50|
|Total Monthly Payments :||$1,936.92|
|Allowable Debt Payments :||$1,076.07|
|Required Income :||$6,456.39|
If you have finally found your dream home and you haven't pre-qualified for a loan yet in order to see how much you can afford when it comes to buying your home, you can work backwards instead. By plugging in certain information, such as the cost of the home, how much the interest rate on the loan is likely to be, and how much you will pay as a down payment, you can determine how much your income will need to be to qualify for the mortgage loan on the home you love.
For example, if the home you are looking at costs $300,000.00 and you plan to put $30,000.00 down on a 30 year loan with a 5.000% interest rate, your total payment on the principal and interest will be $1,449.42. If your annual property taxes are $3,000.00 and your annual insurance is $1,500.00, that will bring your total monthly payment to $1,936.92. With a monthly payment of this amount, your total gross monthly income will need to be at least $6,456.39 in order to qualify for the loan.
Estimated front and back ratios helps you to limit your housing and necessary living spending.
Front ratio is a percentage of your gross income that you can spend on all housing related expenses, including property taxes and insurance. Back ratio is a percentage of your gross income that you can spend on your housing expenses plus cost of shelter: food, clothes, gas, etc.
Front / back ratios with values of 28-33 / 36-42 considered conservative these days, values bigger than 35 / 45 called aggressive and not recommended for use.
Can You Borrow with Your Current Income?
Though you may feel that your finances are ready for a new home, the bank may not feel the same way. Mortgage lenders use a complex set of criteria to determine whether you qualify for a home loan and how much you qualify for, including your income, the price of the home, and your other debts.
The pre-qualification process can provide you with a pretty good idea of how much home lenders think you can afford given your current salary, but you can also come up with some figures on your own by learning the criteria that lenders use to evaluate you.
Home Loan Qualification
Your income is, of course, an important criteria in determining whether or not you can afford the mortgage you want. However, what's even more important is how much income you make in proportion to how much the home costs and in proportion to how much debt you have.
Two important numbers that lenders look at when determining how much you can afford are the front-end ratio and back-end ratio.
The front-end ratio is also called the housing-expense ratio. This looks at how much you make in proportion to how much the mortgage will cost you each month, including extras like private mortgage insurance, homeowners insurance and property taxes. Typically, lenders cap the mortgage at 28 percent of your monthly income.
To determine your front-end ratio, multiply your annual income by 0.28, then divide that total by 12 for your maximum monthly mortgage payment.
The back-end ratio is also called the total debt-to-income ratio, which compares your monthly income to your total debts. This includes not only your expected monthly mortgage payment, but also any other debts, such as a car loan, personal loans, student loans, alimony, child support, medical bills and more.
To determine your back-end ratio, multiply your annual income by 0.36 percent, then divide the total by 12 months. Subtract your monthly debt payments to find out how much you can afford for your monthly mortgage.
Different lenders have different criteria for their maximum front- and back-end ratios and other factors that consider to determine how much you qualify to borrow. In particular, loan programs from the U.S. Department of Agriculture, Veterans Affairs and the Federal Housing Administration have very stringent criteria, which may also include specific caps on your income, regardless or how low your debt levels are.
Home Loan Calculators
Though you will need to meet with a mortgage lender to get a precise understanding of how your financial circumstances affect how much money you can afford to borrow, using the above income qualification calculator can help you get an understanding of what you are likely to be able to afford before you ever start the process of looking for a home or getting pre-qualified for a mortgage.
Just enter the property value, down payment you plan to make, interest rate you are likely to qualify for, length of the loan you desire, your estimated front and back ratio (using our affordability calculator found here) and your estimated annual taxes, insurance and private mortgage insurance. The calculator includes standard amounts for each item in case you aren't sure what to enter. Your results will be e-mailed to you within moments, and you will have a clear understanding of what you can expect when you go meet with a mortgage lender.
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