Once you have decided to purchase a home, the next big question becomes “How much can I afford?” While there are no simple answers to this question, there are a few things you should keep in mind when trying to determine how much you can afford to pay for your home.
As a general rule of thumb, most financial experts recommend purchasing a home that costs no more than 2 to 2 ½ times your gross annual household income. Kevin Koitz of The Koitz Group recommends, "If your gross annual household income is $50,000 per year, you should look at homes that cost anywhere from $100,000 to $125,000. Therefore, if you have a large down payment or if you have relatively few additional debts, you may be able to afford a home with a larger price tag."
Of course, the amount you think you can afford on a home may not be the same as what a lender thinks you can afford. When determining how much they are willing to loan to you, mortgage lenders consider both the front-end ratio and the back-end ratio.
The front-end ratio, also known as the housing expense ratio, is a percentage that is calculated according to your gross monthly income in comparison to your monthly mortgage payment. In general, lenders do not want to see you spending more than 28 percent of your gross monthly income toward your mortgage payment. Therefore, if you have a gross monthly household income of $5,000, most lenders will want your mortgage payment to be $1,400 or less.
The back-end ratio refers to your debt-to-income ratio. This figure refers to your gross monthly income in comparison to how much you pay toward all of your debt obligations. These include your mortgage payment as well as child support, credit cards, car loans, student loans and any other debts you may have. Most lenders want this figure to be below 36 percent, though some will go up to 40 percent or higher.
Of course, you also need to consider the other costs that are related to homeownership aside from the mortgage payment. In addition to having the money to pay for the mortgage, you will also need to purchase furniture, pay for utilities and complete regular maintenance. You may also have homeowner association fees to pay. Be sure to consider all of these extra expenses when determining how much you are comfortable paying for a home.
About the Author – Beth Besecker is a Realtor who writes for realestatemkting.com in his spare time.