|Home Value :||$319,200.00|
|Down Payment :||$31,900.00|
|Loan Amount :||$287,300.00|
|Monthly Principal & Interests :||$1,542.40|
|Monthly Real Estate Taxes :||$250.00|
|Monthly Insurance :||$125.00|
|Monthly PMI :||$119.72|
|Total Monthly Payments :||$2,037.12|
|Monthly Income :||$8,000.00|
|Monthly Debt Payments :||$910.00|
|Actual Front Ratio :||25 %|
|Actual Back Ratio :||37 %|
Before you start looking for a new home, you need to have an idea of how much you can afford to pay for a home. To find this out, you will need to take a closer look at your total monthly household income as well as the debts and regular monthly payments you are already making. In addition, you will need to consider how much money you can put in down payment, the loan interest rate, and the length of the loan. You will also need to have an idea of how much the taxes will be, as well as the insurance and PMI costs.
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.
Using all of this information, you can determine how much you might afford to pay for your mortgage. If you are interested in making a $31,900.00 down payment and hope to get a 30 year loan with a 5.000% interest rate, you can afford to purchase a home that costs $319,200.00 if your gross household monthly income is $8,000.00 and your total monthly payments on your other bills is no more than $910.00.
If you purchase a home under these conditions, you can expect to pay $2,037.12 per month toward your mortgage. $1,542.40 of this will be toward the actual loan, while $250.00 will be toward taxes and $125.00 will be toward insurance.
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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.
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.
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.”
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. These costs are commonly referred to as PITI, which is derived from: pincipal, interest, tax & insurance.
FRONT END RATIO FORMULA:
FER = PITI / monthly pre-tax salary; or
FER = PITI / (annual pre-tax salary / 12)
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.
Some loans place more emphasis on the back-end ratio than the front-end ratio. In the next section we will display a table of widely used loan programs, along with the limits associated with each.
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 complicated. 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.
BACK END RATIO FORMULA:
FER = (PITI + all other monthly debt payments) / monthly pre-tax salary; or
FER = (PITI + all other monthly debt payments) / (annual pre-tax salary / 12)
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 can even have a copy of your information saved for later & available to show lenders other real estate professionals.
Here is a table of common mortgage programs, who they cater to & what their limits are. 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.
|Loan||Who Should Use?||Frontend DTI||Backend DTI||Top Backend||Downpayment||Additional Advice & Information|
|Baseline||28%||36%||20%||Historical baseline for a great home buyer who qualifies for a competitive APR. 35% of borrowers who finance put at least 20% down - about 2/3 don't. Those who don't are usually required to get PMI until LTV drops below 80%.|
|Conventional||Most home buyers||back-end ratio more important||36%-43%||45%-50%||3% to 20%||Every lender decided based on a variety of factors. Most borrowers choose FRM over ARM loans. 30-year FRM is the most popular option. MIP is similar to PMI, though lasts onger.|
|FHA||Borrowers with poor credit scores & limited downpayment||31%||43%||57%||3.5%||Higher ratios also require compensating factors for loan approval. Credit score above 580 ok, credit score from 500-579 require 10% downpayment.|
|VA||Active duty military members & veterans||back-end ratio more important||41%||~ 47%||0%||Each veteran is considered based on a variety of factors. Approvals above 41% require an explanation. Both BAH and BAS are counted as income to help borrwers qualify. Loans have a relatively small funding fee.|
|USDA||Low-income rural||29%||41%||41%||0%||Maximum allowable income is 115% of local median income. Most of the land mass of the nation outside of large cities qualify for USDA. Top backend limit rises to 44% with PITI below 32%. A small funding fee of about 1% is added to the loan.|
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.