Guidelines from Bankrate.com
EDITOR'S NOTE: Before you start searching for a home to purchase, it's helpful to know what you can afford. Managing your own expectations is key to having a good experience. Why get all enthused about a property you just cannot afford? By the same token, you may find you can afford more than you realized. The following information from bankrate.com will help you find your financial comfort zone. Bankrate.com provides the information for the weekly Mortgage Guide in HomeHunter.
Mortgage lenders are chiefly concerned with your ability to repay the mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment. So how much house can you afford? To know that, you need to understand a concept called “debt-to-income ratios.”
The standard debt-to-income ratios are the housing expense ratio and the total debt-to-income ratio. These are also known as the front-end and back-end ratios, respectively.
The housing expense, or front-end, ratio shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing expense ratio, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense ratio. (Maximum housing expense ratio = annual salary x 0.28 / 12.)
The total debt-to-income, or back-end, ratio, shows how much of your gross income would go toward all of your debt obligations, including mortgage, car loans, child support and alimony, credit card bills, student loans and condominium fees. In general, your total monthly debt obligation should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio. (Maximum allowable debt-to-income ratio = annual salary x 0.36 / 12.)
Take a homebuyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income is $933. ($40,000 x 0.28 = $11,200, and $11,200 / 12 months = $933.33.)
Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200. ($40,000 x 0.36 equals $14,400, and $14,400 / by 12 months = $1,200.) The following chart shows your maximum monthly payment and maximum allowable debt load based on your gross annual income. (Remember, gross income is pretax income.)
Debt-to-income ratio examples
Gross income 28% of monthly 36% of monthly
$20,000 $467 $600
$30,000 $700 $900
$40,000 $933 $1,200
$50,000 $1,167 $1,500
$60,000 $1,400 $1,800
$80,000 $1,867 $2,400
$100,000 $2,333 $3,000
$150,000 $3,500 $4,500
Here's a look at typical debt ratio requirements by loan type:
Conventional loans: Housing costs: 26 percent to 28 percent of monthly gross income. Housing plus debt costs: 33 percent to 36 percent of monthly gross income.
FHA loans: Housing costs: 29 percent of monthly gross income. Housing plus debt costs: 41 percent of monthly gross income.
Taxes and insurance
In addition, lenders include the cost of taxes and insurance when calculating how much house you can afford:
Real estate taxes: Because property taxes are part of your monthly mortgage payment, it is important to get an estimate of what yours would be. Ask your real estate agent or tax office for the rates that apply in the area that interests you.
Homeowners insurance: You must insure your property to obtain a mortgage. You can get an estimate of insurance costs from an insurance agent or insurance company. Be sure to inquire about special requirements for hazard insurance, such as mandatory coverage for floods, earthquakes or wind (in coastal areas). If you put down less than 20 percent of your home's value, you also will have to obtain mortgage insurance or take out a second loan, called a piggyback loan, to bring the first mortgage down to 80 percent of the purchase price. Both alternatives will raise your monthly payment.
Last weekend for Multi-site Parade of Homes
11 a.m. - 5 p.m. today and Sunday
After you figure out how much house you can afford, find a match for your budget at the 2012 Multi-site Parade of Homes, now in its final weekend. From 11 a.m. to 5 p.m. today and Sunday, you'll have the opportunity to see a wide variety of styles, price points and communities. Of the 15 decked out homes, there are 10 single-family homes, two remodeled homes, and three condominiums. Prices range from a high of $1,650,000 to a modest $144,900. Square footage of space ranges from a high of 5,727 to 1,600. Imagine downtown Akron at the hub of the scattered site locations and you'll find four homes to the north, six homes to the south, three homes to the west and two homes to the east. In addition to ranch and two-story floor plans, here are some highlights to watch for:
Exteriors featuring Old World stone and stucco, colonial-style window and door trim, Tudor-style beams, cedar accents, brick detailing and textured vinyl siding
Custom closets and bedroom balconies
Custom Tuscan and maple cabinetry
Granite and stone countertops in gourmet kitchens
Elm and hickory flooring
Paneled libraries and wine cellars
Coffered ceilings and open floor plans
For a printable map, list of addresses and more details about the 15 homes in the 2012 Multi-site Parade, go to akronhba.com.