As you begin to shop for a home, knowing how much house you can afford is a critical first step. The best way to determine your affordability is to meet with a reputable mortgage lender. The purpose will be to discuss your financial situation and prequalify for a home loan. During this process, known as prequalification, a professional mortgage lender will be happy to help you without further obligation to prequalify for a home loan. For a rough estimate of the house payment you can afford, you may follow the steps here:
Step One - INCOME RATIO (28%)
Multiply Total Gross (before taxes) Monthly Income (self + any
co-borrowers) by .28 to get your Estimated Maximum Monthly House Payment.
$ x .28 = $
Step Two - TOTAL DEBT RATIO (36%)
(A) Multiply your Total Gross Monthly Income by .36. $ x .36 = $
(B) Add together your Monthly Installment Debts. (Include all debts with 10 or more payments remaining, e.g., car, credit cards, child support / alimony)
(C) Subtract the answer (B) from (A) to get your Estimated Maximum Monthly House Payment (principal, interest, taxes and insurance) (A) $ - (B) $ = (C) $ *
* If a difference exists between the amounts of your Estimated Maximum Monthly House Payment in Step One and Step Two, use the lesser of the two as your guideline. Before a lender makes a decision regarding your loan, additional information will be requested (credit history, other income sources, etc.). Formulas and ratios may vary based on loan type and lender.