This is a typical question many
homebuyers ask. How much of my income
should be applied to my house payment?
The answer you'll hear from one lender to the next or depending on the
loan program can be a wide range. For example, many conservative lenders will
say it is between 28% and 36%. While more aggressive lenders may allow up to
50% of your monthly gross income on conforming and non-conforming loans.
Are you budgeting already?
Figuring out how much you can afford
for your monthly housing payment shouldn't automatically be determined by an
arbitrary percentage. Some people are comfortable paying a certain percentage
each month and then there's others who have the means to allocate more money
for housing such as half of their income.
A large majority of conforming
mortgages are underwritten by an automated system that uses a maximum back-end
DTI percentage of 43 or 45. Other programs like an FHA (Federal Housing
Administration) loan are more generous and may offer the borrower a
debt-to-income ratio up to 55%.
Important factors that dictate an
automated approval are things such as the individual's credit profile, credit
score, down payment, liquid assets, and type of loan. What got one person approved doesn't always
mean it will work for another borrower with many of the same data. Getting advice from an experienced loan
officer is a great place to start.
To clarify, the back-end debt to
income (DTI) ratio consists of the housing payment and the borrower's other
monthly debt obligations. A front-end
DTI is only the housing payment and many lenders use 28-33% but that is not set
in stone so it pays to use a company that can shop around for multiple programs
to satisfy your financial goals.
Real Examples
Let’s look at two borrowers whose
gross monthly income is $8,000.
Borrower A has monthly debt of $1500
and Borrower B has monthly debt of $800.
FHA Mortgages
FHA will permit as much as 55% debt
ratio. Monthly Income * 55% = max
housing and debt
If the gross monthly income is $8000
then $8000 * 55% = $4400
Borrower A has monthly debt of
$1500. If max housing and debt is $4400
then the difference may represent the maximum housing payment. $4400 – $1500 = $2900 housing payment limit.
Borrower B has monthly debt of $800.
If maximum housing and debt is $4400 then the difference may represent the maximum
housing payment. $4400 – $800 = $3600
max housing payment.
Conventional Loan
A conventional loan may offer up to
a 50% debt-to-income ratio. Income * 50%
= max housing and debt
If the gross monthly income is $8000
then $8000 * 50% = $4000
Borrower A has monthly debt of
$1500. If max housing and debt is $4000
then the difference may represent the maximum housing payment. $4000 – $1500 = $2500 max housing payment.
Borrower B has monthly debt of $800.
If max housing and debt is $3000 then the difference may represent the maximum
housing payment. $4000 – $800 = $3200
max housing payment.
So, you know your maximum allowed
payment. What is the maximum sales price?
Once you know your highest payment
you're eligible, simply do the math in reverse to determine the maximum loan
and sales price.
While you can try to do
this to get an approximation, other critical factors that must be included are
the county property taxes, homeowners insurance, and if applicable mortgage
insurance, flood insurance and HOA fee.
That's a lot of math to do without the necessary and accurate
information. These variables easily
accessible by a licensed mortgage professional.
