Know what you
can afford is the first rule of home buying, and that
depends on how much income and how much debt you have.
In general, lenders don't want borrowers to spend more
than 28 percent of their gross income per month on a
mortgage payment or more than 36 percent on debts.
It pays to check with several lenders before you
start searching for a home. Most will be happy to
roughly calculate what you can afford and prequalify you
for a loan.
The price you can afford to pay for a home will
depend on six factors:
1. gross income
2. the amount of cash you have available for the down
payment, closing costs and cash reserves required by the
lender
3. your outstanding debts
4. your credit history
5. the type of mortgage you select
6. current interest rates
Another number lenders use to evaluate how much you
can afford is the housing expense-to-income ratio. It is
determined by calculating your projected monthly housing
expense, which consists of the principal and interest
payment on your new home loan, property taxes and hazard
insurance (or PITI as it is known). If you have to pay
monthly homeowners association dues and/or private
mortgage insurance, this also will be added to your PITI.
This ratio should fall between 28 to 33 percent,
although some lenders will go higher under certain
circumstances. Your total debt-to-income ratio should be
in the 34 to 38 percent range.
