In this example, we assume the borrower is earning $100,000 per year and making $1,000 per month in minimum monthly payments on his or her debt. This debt could include a car loan, credit card debt or other financial commitments. We also assume that the borrower gets a 30 year mortgage at a 4.75% interest rate and can make a down payment of $20,000.
The mortgage payment on a house at this price should fit within your monthly budget. Learn more.
You can see that the borrower may be able to purchase a home for $326,829 at a risky debt-to-income ratio of 41%. If the borrower was able to pay off in full his or her debt, the same price home and mortgage payment would result in a very conservative 29%!
Home Financing Tips
Focus on what you can comfortably afford and not the maximum amount that a lender will approve for you.
Using a high proportion of your income to pay your mortgage increases the risk of foreclosure or bankruptcy in the event you incur to cover unexpected expenses such as high medical bills or unexpected loss of income like job loss.
Your debt-to-income ratio may be used to determine: the loan programs that you qualify for; the maximum mortgage amount you qualify for; and how much you can can afford to pay for a home. It is an important measure of risk used by mortgage lenders. One common type of debt-to-income ratio excludes your mortgage payment from calculation. Another includes your prospective mortgage payment along with all other required debt payments. The ratio used by the affordability calculator includes recurring payments on your debt and your housing payment, including principal, interest, taxes, hazard insurance, mortgage insurance and homeowners association dues. It is generally limited to 36% for conventional loans and 43% for FHA loans. These guidelines are subject to change. Also, some lenders may consider compensating factors in allowing higher debt-to-income ratios.
The amount you can comfortably spend up-front when buying your new home to make up the difference between the purchase price of the home and your mortgage amount. Lenders may require that you have at least a minimum amount of cash reserves after making the down payment.
Your Homeowners Association dues, if any, will be included in calculating your debt-to-income ratio which helps lenders determine the maximum mortgage loan amount you qualify for.
Your insurance premium will be included in your debt-to-income ratio which lenders use to help determine the maximum mortgage loan amount you qualify for.
Your gross income before taxes and deductions. It may include wages, salary, alimony, child support, retirement and certain other income. Lenders may make adjustments to determine the amount of stable and continuous income that will be available to you and your spouse for loan qualifying purposes.
The portion of your mortgage payment that is due to the interest rate being applied to the principal balance. The Total Interest for a mortgage is the sum of all interest paid over the life of a loan.
Your recurring monthly payments on revolving and installment debt including car loans, personal loans, student loans, credit card balances.
The portion of your mortgage payment that is used to pay down the current balance of your mortgage. The principal balance represents how much you owe on the mortgage.
Private Mortgage Insurance (PMI)
Lenders often require borrowers to pay Private Mortgage Insurance (PMI) on mortgages with a loan-to-value ratio of more than 80%. PMI insures the lender in the event of a borrower default. Making a down payment of 20% or more of the purchase price of your home is one way you may be able to avoid being required to pay mortgage insurance.
The property taxes on your home are included in the calculation of your debt-to-income ratio and in determining the maximum mortgage loan amount you qualify for.
The initial interest rate on an Adjustable Rate Mortgage.
Taxes and Insurance
Mortgage lenders generally require that taxes and insurance be included in a borrower's mortgage payments. These payments may be for property taxes, homeowner's/hazard insurance, and mortgage insurance. Other required payments may include homeowners' association dues.
The amortization term is one of the key factors that determine your required mortgage payment. Your required mortgage payment for fully amortizing mortgages is the amount that would result in the mortgage being closest to being paid off by the end of the amortization term. Longer amortization terms result in lower required mortgage payments for fully amortizating mortgages, all other things being equal.