Thursday May 17, 2018
The maximum amount you can spend on your new home loan can easily be determined by a mortgage lender. How much you should spend is more personal and depends on your new home needs, budget and financial goals.
Your mortgage lender can advise you as to how much you can afford, based on your income and debts. Here is how the lender will typically determine affordability:
Your debt-to-income is considered in two parts -- the front-end ratio and the back-end ratio.
Debt-to-Income: Front-End Ratio
The first component of the debt-to-income ratio is the "front-end ratio".
Front-end ratio compares the expected monthly housing payment to your monthly income, where "housing payment" includes all of the following obligations:
- Monthly principal + interest payments
- Monthly real estate taxes due
- Monthly homeowner’s insurance due
- Monthly dues due to an association
Lenders prefer to see front-end DTI of 28% or less. This means that banks prefer that 28% or less of your total monthly income be allocated to your housing payments.
Debt-to-Income: Back-End Ratio
The second component of debt-to-income ratio is the "back-end ratio".
Back-end ratio compares not the monthly housing payments against a buyer's monthly income, and all other monthly payments, too.
Back-end ratio accounts for all of the following monthly obligations you may have:
- Monthly housing payment(s)
- Monthly minimum credit card payments
- Monthly child support or alimony
- Monthly car payments for a car loan or lease
- Monthly payments to an installment loan
Banks typically want to see a back-end ratio of 36% or less.
To determine your ratios, interest rate is an important factor, as it will factor into your monthly housing payment. Knowing today’s current rates is helpful, but remember your rate is largely determined by your credit score. A good credit history will help you get a more favorable interest rate, which in turn means you can take out a larger loan without raising your monthly mortgage payment.
Your new home sales professional can give you information on real estate rates, HOA fees and other expenses, so you can accurately budget for your new home.
Check out our helpful mortgage calculator to help estimate your monthly payment.