Prospective homebuyers must answer many questions, but the first is always "How much home can I afford?" In the past, the rule of thumb was to shop for a home worth about two and a half times your total household annual gross income. So if a couple had a combined annual grossincome of $100,000, theycould afford a $250,000 home. But today, low interest rates and the ability to put as little as 5 percent down means home buyers have much more flexibility when they go shopping for a home.
Calculating a debt-to-income ratio will give you a much better idea of how much of your income will be available for monthly mortgage payments, including principal, interest, taxes and insurance -- collectively referred to as "PITI".
Many experts agree that the total amount you pay toward your mortgage (PITI) should not exceed 28 percent of your gross income. The total amount you pay in debt-related expenses, including your mortgage, car loan payments, credit card bills, student loan payments, and any other debts, should not exceed 36 percent of your income.
So how much can you afford to pay each month? The first step is to determine your total income. This includes not only your regular salary, but also:
* Bonuses
* Regular income from dividends and interest.
* Assistance or support payments, such as alimony or child support
* Payment from tips or commissions
The total of all these figures will give you your gross annual income; dividing by 12 will yield your monthly gross income. Multiplying your monthly income by .28 will give you an idea of how much you can afford in monthly mortgage payments.
For example, if your total householdincome is $80,000, your monthly income is $6,667. At 28 percent, you can afford to spend $1,867 on mortgage payments (PITI) per month. At 36 percent you would get a total of $2,400 in debt-related expenses per month.
At this point you are ready to consider your loan options and use online calculators to see where you stand. Continuing with the example above, if you find a mortgage loan that would cover your needs would require an inclusive PITI monthly payment of $1,500, you would be well under your $1,867 limit. Next, factor in your average monthly credit card expenses, car payments, and any other rotating charges. If that total came to $800, your total debt burden would be roughly $2,300 -- $100 less than your $2,400 limit.
Ultimately it is up to you to apply these formulas and ratios to your own financial situation. Remember, while the numbers may help you get approved for a loan, they won’t provide you with the whole story. Some people can afford a little more, which others should pay less depending on lifestyles and other factors.
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