Home Buying in Georgia>Question Details

JVMay, Home Buyer in 30824

What percentage should your mortgage be of your income?

Asked by JVMay, 30824 Wed Aug 13, 2008

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7
You will need to determine what your Debt-To-Income ratios are. We refer to this as DTIs and there are two types: the “front ratio” and the “back ratio”. I also reccomend that you stay at the low end of the range as defined below.

The front DTI ratio consists of your total housing expenses on a refinance, or your anticipated housing expenses on a purchase, divided by your gross income. The traditional range of this front DTI ratio is between 28 and 33 depending upon the ultimate lender, as each one has different guidelines. If you are below this level (which you should be) then you will most likely receive an approval from the lender as long as your back ratio is also acceptable and you meet all of the other guidelines that lender may have. Your mortgage planner will be able to counsel you on this.

To determine your front DTI ratio your mortgage planner will run the following calculation.


FRONT DTI RATIO CALCULATION:

Monthly mortgage payment
+ Monthly property taxes = front DTI ratio
+ Monthly cost of homeowner’s insurance
Gross monthly income

Let’s plug in some numbers to see what this might look like for you:

$1,875 mortgage payment
+ $800 monthly property taxes = 28.6 front ratio
+ $70 monthly cost of homeowners insurance
$9,583.33 average monthly income

We arrived at your average monthly income by taking your total gross annual income and dividing it by 12. We do not use your last pay-stub to determine this as it might be larger or smaller than average depending upon overtime, commissions, bonuses or other factors. In this illustration we used $115,000 as the total household income from all sources. Divided by 12, it yields an average monthly income of $9,583.33. Simplifying the formula, the front DTI calculation looks like this:

$2,745 total housing expenses ÷ $9,583.33 average monthly income = 28.6 front ratio

Not to complicate matters, but if you are buying into a condominium complex or if there are any association dues or fees for your home, that monthly amount will also be added to your other monthly housing expenses and the total then divided by your average monthly income.

This answer is an excerpt from chapter 4 of my book. I hope it helped?
Rgds,
Dave Muti
1 vote Thank Flag Link Wed Aug 13, 2008
Hi JV. I always tell my buyer there are two issues to this question. What the system will let you do--about 29% for home debt and 12 percent for combined other debt like cars and credit cards. And, what you feel comfortable doing. As someone below said, that second number is often lower than the first. Part of the current problem exists because those ratios were loosened significantly and w/ the stars in alignment, you might have a total debt ration of 50 percent of your income.

Another factor to consider is, are you factoring in both husband and wife (or all adult parties regardless of relationship)? I think in the current mess, a real effort should be made to accomplish the financing based on the primary earner's income and buy a bit cheaper. My wife and I were military and then DOD Civilian for 27 years. During this time, my wife's primary job was homemaker and she did a great job. But we struggled because we had to live on one income. The homes we have purchased were based on one income. We are grateful this habit as it has made our life much more convenient and secure now.

Point being, these are tough times, err on the side of caution.
0 votes Thank Flag Link Fri Nov 21, 2008
The smart people don't go over 25% of their gross income.
Web Reference: http://GetPrequalified.com
0 votes Thank Flag Link Fri Nov 21, 2008
JV;

There is much more about your situation that a loan professional would need to know about your situation before they could guide you in making this decision.
How much loan you can afford will be influenced heavily by your other obligations and by your life style. You need to take into consideration your routines and your family's needs. As already suggested, planning out what you spend each month & each year would be a good starting place. That will give you an idea of what you can spend. Each of us lives a little differently.

Roughly 30% of your income is a good place to start, but there are many types of loans. Each one has its own requirements regarding debt to income ratios and downpayments and needed reserves.

You really do need to find a good lender in or near your local area to assist you in planning.

Valerei McDonald
Metro Brokers/GMAC Real Estate
404-843-2500
valerie.mcdonald@metrobrokers.com
0 votes Thank Flag Link Thu Aug 14, 2008
As low as possible.

You're asking the wrong question.

You should be asking, what can I afford per month for housing? Or better yet, what's the most and least I would want to spend on housing each month.

Knowing those answers will help you when you talk to a loan professional like Theresa Laine at 770-891-4121. She'll walk you through all the steps. It's not about what you qualify for, it's about what you can afford.
0 votes Thank Flag Link Thu Aug 14, 2008
Joshua Jarvis, Real Estate Pro in Duluth, GA
MVP'08
Contact
JVMay... there are charts that can guide you for loan approval; however, more important than loan approval is what your comfort level is. I can assure you that you will end up hating the home you purchase if you become "house poor" meaning you cannot afford vacations, nights out, or shopping. Loans are approved based on your credit report and how much the items on your report cost you on a monthly basis... they do not take into consideration your Starbucks habit etc.

You need to look at your habits keeping in mind even with the best intentions habits are hard to break. I think it is best for borrowers to first determine what amount each month is remaining after paying rent and other bills plus the cost of living. This will allow a borrower to determine an amount that will allow them to still live comfortably doing what they like to do. Then plug that amount into a mortgage amount.

Know your budget and stay within it. Push your limits and you could end up in foreclosure.
Web Reference: http://www.HomesByLorie.com
0 votes Thank Flag Link Wed Aug 13, 2008
You will need to make three times your monthly payment, you need to pay 30% of your gross monthly income
0 votes Thank Flag Link Wed Aug 13, 2008
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