| These days we are seeing sales of existing homes | | | | taxes, insurance payments and heating & utility |
| falling as much as 1 percent in a month. Some major | | | | costs shouldn't be more than 32 percent of your |
| cities, like Philadelphia, have seen home sales drop by | | | | monthly pretax income. To calculate your current GDS, |
| more than 20%. In such previously hot markets like | | | | divide your total monthly housing expenses by your |
| South Florida, California and Nevada, home prices | | | | gross monthly income and multiply by 100. To |
| continue to slide. Recently a Federal home-price index | | | | determine what lenders will consider your maximum |
| recorded its biggest decline as it was reported that | | | | allowable housing expenses, multiply your gross annual |
| National home prices are essentially stuck in quicksand. | | | | income by 0.32 and then divide by 12. |
| Financial markets are growing more convinced that the | | | | Debt-to-Income Ratios |
| Fed has now moved to the sidelines and will not cut | | | | To determine your maximum mortgage amount, |
| rates further out of concern about inflation pressures. | | | | lenders use the above guidelines, called debt-to-income |
| The Fed aggressively cut rates seven straight times | | | | ratios. This is simply the percentage of your monthly |
| starting in September of 2007, with the last reduction | | | | gross income (before taxes) that is used to pay your |
| occurring in April of 2008. | | | | monthly debts. Because there are two calculations, |
| Considering current economic conditions, is this a good | | | | there is a "front" ratio and a "back" ratio and they are |
| time to purchase a home? If so, how much should you | | | | generally written in the following format: 33/38. |
| spend on a home? Once you've decided to forego | | | | The front ratio is the percentage of your monthly |
| your renting ways and start paying off own mortgage | | | | gross income (before taxes) that is used to pay your |
| instead of someone else's, the question you must ask | | | | housing costs, including principal, interest, taxes, |
| yourself is how much house or actually, home much | | | | insurance, mortgage insurance (when applicable) and |
| mortgage can you afford? This question has two | | | | homeowners association fees (when applicable). The |
| answers: 1) how much do you feel comfortable | | | | back ratio is the same thing, only it also includes your |
| borrowing? And 2) how much will a lender give you? | | | | monthly consumer debt. Consumer debt can be car |
| You can use mortgage calculators to help you | | | | payments, credit card debt, installment loans, and similar |
| determine the answers to the above questions. This | | | | related expenses. Auto or life insurance is not |
| article will help you understand the inputs to these | | | | considered a debt. |
| calculators, so you can be sure that you accurately | | | | A common guideline for debt-to-income ratios is 33/38. |
| determine how much home you can afford. | | | | A borrower's housing costs consume thirty-three |
| When it comes to how much house you can afford, | | | | percent of their monthly income. Add their monthly |
| you are the best expert. Before you sign up for the | | | | consumer debt to the housing costs, and it should take |
| maximum mortgage for which you qualify, consider | | | | no more than thirty-eight percent of their monthly |
| that how much may actually get you outside your | | | | income to meet those obligations. |
| comfort level. Home buyers need to consider their | | | | The guidelines are just that and they can be flexible. If |
| future carefully before choosing a mortgage. Big life | | | | you make a small down payment, the guidelines will be |
| changes can mean trouble when it comes to making | | | | more rigid. If you have marginal credit, the guidelines |
| your payments. If you've never made a budget, before | | | | are the most rigid. Conversely, if you make a larger |
| you purchase a home would be a great time to start. | | | | down payment or have sterling credit, the guidelines |
| Think about how much cash you think you can | | | | are less rigid. These guidelines can also vary according |
| comfortably afford to devote each month to housing | | | | to loan program. FHA guidelines state that a 29/41 |
| (mortgage) payments? Are you willing to forego | | | | qualifying ratio is acceptable. VA guidelines do not |
| movies and dinner out or bring lunch to work every | | | | have a front ratio at all, but the guideline for the back |
| day? What about giving up a second car? Some | | | | ratio is 41. |
| people will do anything to own a home. The problem is | | | | For example, if you make $5000 a month, with 33/38 |
| some stretch themselves too far and find themselves | | | | qualifying ratio guidelines, your maximum monthly |
| pouring all of their income into the house. The result is | | | | housing cost should be around $1650. Including your |
| permanent financial stress. | | | | consumer debt, your monthly housing and credit |
| The problem for many first-time home buyers is they | | | | expenditures should be around $1900 as a maximum. |
| make the mistake of assuming they can afford | | | | To arrive at an "affordable" home price, follow the |
| monthly mortgage payments as big as their current | | | | guidelines of most lenders. I recommend allowing a |
| rent payments. While it makes a certain amount of | | | | total debt-to-income ratio of no more than 36 percent. |
| sense, that calculation overlooks some major factors. | | | | Assume a housing payment-to-income ratio of 28% |
| Property taxes and all those other ownership-related | | | | for a conservative estimate and 33% for an |
| costs can add up to about the equivalent of three or | | | | aggressive one. Before buying, however, you should |
| more months of rent a year. Other monthly expenses | | | | also factor in other savings needs, including retirement |
| to consider include mortgage loan and home owners | | | | (401k) and college. |
| insurance, the mortgage insurance is required by | | | | Following is a list of typical income and debt obligations |
| lenders if you have a high-ratio mortgage (usually | | | | you may need to know to accurately complete |
| when the loan to value of the home is greater than | | | | mortgage calculator calculations. |
| 80%). | | | | 1) Current combined annual gross income |
| There is a more precise rule of thumb for determining | | | | 2) Monthly child support payments |
| how big a mortgage you can afford. First, you need to | | | | 3) Monthly auto payments |
| know your total monthly debt load and your total | | | | 4) Monthly credit card payments |
| monthly housing costs to figure out an affordable | | | | 5) Monthly association fees |
| maximum mortgage payment. | | | | 6) Other monthly obligations |
| Keep your debts around 40 percent. In other words, | | | | The housing market is currently facing numerous |
| the combined amount you pay in housing costs, car | | | | troubles as buyers stay on the fence and rising |
| loans, personal loans and credit card debt shouldn't be | | | | mortgage defaults dump more homes on a glutted |
| more than 40 percent of your pretax income. To | | | | market. This can be a great time to buy a house, if |
| calculate your current TDS, divide your monthly debts | | | | you can afford one. Once you've had a chance to pull |
| by your monthly pretax income and multiply by 100. To | | | | together your financial information and think about how |
| determine what lenders will consider your maximum | | | | much house you want, find out how much house you |
| allowable debt, multiply your gross annual salary by | | | | can afford with our mortgage affordability calculator. |
| 0.40 and then divide by 12. | | | | Then, check out the going mortgage rates for your |
| Cap your housing expenses at 32 percent. That | | | | area. |
| means your monthly mortgage payment, property | | | | |