Figuring Your Housing Budget
It’s important that you have a ballpark idea of how much house you can comfortably afford before you start looking for a home, and even before meeting with your mortgage broker or lender.
To get a rough estimate of how much you’ll qualify for, do what the lenders do “ plug your budget numbers into these basic mortgage calculation formulas.
Lenders typically use one of two formula guidelines; although most will require that you meet both sets of guidelines. There are other formulas that exists and thus even if you don’t meet the guidelines, talk with your chosen home mortgage consultant so he or she can provide additional details specific to your situation, you may find you qualify under another standard. For example, VA loans are calculated on a single ratio that’s based upon mortgage payment and all debts. If you have very little debt, this formula may allow you to qualify more easily for a more expensive home.
Of the two usual formulas, the first compares income-to-housing costs (without including long-term debts), while the second includes all debts.
|28 Percent Formula||Total monthly housing costs (P.I.T.I.) = 28 percent (or less) of gross monthly income.|
|36 Percent Formula||P.I.T.I. + all monthly debts = 36 percent (or less) of gross monthly Income.|
So, a family with a gross monthly income (before taxes) of $4,000, might qualify for a home mortgage with monthly payments between $1,120 ($4000 x 1.28) and $1,440 ($4000 x 1.36) a month.
These percentages may be slightly less if you have long-term debts (more than eight months) or alimony/child support payments. The number and ages of your children as well as household budget items may also have an impact.