What Can You Afford?

To determine maximum mortgage amounts, lenders use guidelines called debt-to-income ratios. This is the percentage of your monthly gross income (before taxes taken) that is used to pay monthly debts. Because there are two calculations, there is a ‘front’ ratio and a ‘back’ ratio and they are generally written in the following format of 33/38.

The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay housing costs, including principal, interest, taxes, insurance, mortgage insurance, and homeowners association fees (if applicable). The back ratio is the same, only it also includes monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Auto or life insurance is not considered a debt.

A common guideline for debt-to-income ratios is 33/38. A borrower’s housing costs expends thirty-three percent of monthly income. Add monthly consumer debt to the housing costs, and it should take no more than 38 percent of monthly income to meet obligations.

These are just guidelines and are variable. The smaller the down payment, the more rigid the guidelines are. If you have marginal credit, the guidelines are more rigid. If you make a larger down payment or have sterling credit, the guidelines are less rigid. The guidelines also vary according to loan program. FHA guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.

Case in point: Making $5000 a month, with 33/38 qualifying ratio guidelines, maximum monthly housing cost should be around $1650. Including consumer debt, monthly housing and credit expenditures should be around $1900 as a maximum.

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