The first thing you need to know before you start searching for a home is what you can afford. To calculate this, there are 2 important ratios that a mortgage lender will use.
Your Front-End Debt-to-Income Ratio:
Your front-end DTI ratio compares your expected monthly housing cost against your income. Your housing cost includes home-related expenses such as your principal and interest, homeowner’s insurance, real estate taxes, and HOA dues. Use this number to get a general idea of how much you can afford to pay on a new home. Lenders typically look for borrowers with a front-end DTI ratio at or below 28% of their total monthly income.
Your Back-End Debt-to-Income Ratio:
You also have a back-end DTI ratio, which requires a more comprehensive look at your finances. Compare your monthly income against your expected monthly housing payments and other debt obligations. This may include (but is not limited to) your credit card payments, child support or alimony, insurance policies, car payments or leases, and student loans.
Most lenders will look for a back-end DTI ratio of 36% or less. You may still qualify for a loan with a higher back-end DTI ratio, but you are likely to pay a higher interest rate. In this situation, you may want to consider looking for a less expensive home to bring you into the 36% back-end DTI ratio range.
Feel free to contact me to discuss your income-to-debt ratio or any other real estate needs!