Let’s start with what is affordable to you: in general, this means your total debt payment should not be more than 36% of your gross income.
How is that work? : you enter your monthly debt which includes all your credit cards, student loans, and any car payments, then come up with the maximum payment you can afford while staying under that threshold.
Why do lenders use this scale? based on experience, this method has proven to be effective to measure the comfort zone of any borrower’s ability to repay.
What do I include with my payments? Once you have all your numbers, you should include 1% of property taxes ( based on the purchase price) and 0.4% for homeowners insurance. On subdivisions where HOA is required, the lender will include that as well to calculate your debt to income ratio. If you are purchasing with less than 20%, you should add the mortgage insurance into your equation. Most payments are calculated based on 30 years mortgage. Interest rate can play a big factor in your mortgage affordability. The lesser it is, the bigger payment you can afford.
What else should I take into count? If you are saving for retirement, college, private schools titution, health care, you should reduce the maximum target. Although lenders do not count these into the debt ratio, having them included in your numbers will help you a great deal. Child care and alimony will be something lenders will use in determining your level of affordability.
If you have further question or need expert advice, please feel free to call us at 407-574-5920