When you’re interested in purchasing a home, the mortgage company will usually determine the amount you can afford by using one of two formulas.
The monthly Housing Payment to Income Ratio (Front Ratio) is a fairly simple formula. It adds your future principle and interest payment, property taxes and insurance together to get what is called a “PITI” payment. This amount is divided by your gross monthly income to produce a percentage. An acceptable percentage varies by type of loan such as conventional, FHA, or VA. The acceptable percentages are usually between 28 percent for conventional, 31 percent for FHA and up to 41 percent for VA loans.
The Debt to Income Ratio (Back Ratio) is not as simple. It not only adds the PITI payment, but all monthly payments. This includes auto loans, credit card payments, installment debt and other monthly debt reported to the credit bureaus. The acceptable percentage using this method is higher but also varies by loan type.
The easiest way to figure out what you can afford is to figure out your Housing to Income Ratio using a monthly payment that produces a final percentage slightly under 28 percent of your gross income. Then using a loan amortization chart, you can identify the appropriate price range for your future home. Of course, the overall price range is also affected by the amount of your down payment, current interest rates, and the term of the loan.
Most REALTORS work with mortgage companies and offer professional consultation to help you determine how much you are qualified to purchase. If you are considering buying a home in the near future and require competent and caring representation, please call me at 361-550-4304.