How Much Can I Afford Mortgage

How Much Can I Afford Mortgage?
This is a great place to start in finding out how much you can afford for a new home.

Calculate your affordable price range and monthly mortgage payment before you look for a home. See high and low estimates of the home you can finance and find loan options that extend your affordable range. You may also call us at 616-534-3104 for assistance in determining your price range for your new home.

The rule of thumb in the past is banks liked to see debt ratios of 28%/36%. The 28% (total housing expense, this includes mortgage payment (principal and interest), property taxes, homeowners insurance, and any other type of money or annual payment associated with the property, (association dues, private road maintenance fee, etc.). The 36% is all debts that include total housing expense and consumer debts (auto, credit cards, personal loans, etc.). Remember, the items reported on your credit report are all that is used to determine your debt to income ratio or DTI.

Sample of how to determine your affordability for a new home.

The first step in finding a home is figuring out how much of an expense you can meet. There are different factors to consider when making this decision, with three of them related to a mortgage, and the other three focused on broader personal considerations, such as how long you plan to own the home, (What type of loan program to consider).

The Loan
Taking out a home loan is probably the longest process facing prospective home professional loan officers. The lender will ask you all sorts of questions about your income and savings, and make sure the home you are purchasing is fully functional.

Look at it as if you were loaning the money. If you were going to lend people money, what would you want to know about them? Basically, you'd like to know The four C's. (1) credit, (2) collateral. (3) capacity to pay (4) and character.

Ideally, you will want to come up with at least 20% of the value of your new home as a down payment, to avoid things like mortgage insurance payments. But, you probably qualify for plenty of financing arrangements that will get you into a new home for as little as 3% of the asking price. We'll talk more about business and those special programs later.

The lender will also plug your income numbers into a couple of formulas: the front-end ratio (having to do with your loan payments) and the back-end ratio (having to do with your debt).

Let's say your gross income is $4,000 a month, and you have $400 a month in debt payments. The rule of thumb is that they'll allow you to pay 29% of your gross income toward your loan payment every month. This is known as the front-end ratio. In this example, 29% of $4,000 is just under $1,200 a month -- so, they'll reason, you can put $1,200 toward your loan payment.