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One of the first steps in
buying a new house is to arrange
a mortgage loan.
The amount you can borrow will
depend on a number of factors,
including your ability to repay
the loan.
Your lender will use two
ratio-based guidelines to
evaluate your ability to repay.
The first is your debt-to-income
ratio.
Debt-to-income ratio is the
percentage of your monthly
income that is spent on monthly
debt payments.
So that means your expected
monthly mortgage payment
(principal, interest, taxes, and
insurance) plus your other
monthly debt obligations are
compared to your gross pre-tax
monthly income.
Mortgage program guidelines
vary, but a good rule of thumb
is to keep your total debt level
at or below 36% of your gross
monthly income.
The second, housing-to-income
ratio, is the percentage of your
monthly income that is spent on
monthly housing payments.
So your lender will also compare
just your expected monthly
mortgage payment (including
taxes and insurance) to your
gross monthly income.
Mortgage program guidelines
vary, but a good rule of thumb
is to keep your housing expense
level at or below 28%.
Even if you fall within these
guidelines, make certain that
you feel comfortable making your
monthly mortgage, insurance, and
tax payments along with the
payments for all your other
monthly obligations.
These obligations include
savings, debts or loans,
groceries and household
supplies, clothing, shoes and
accessories, transportation,
gifts and charitable donations,
Internet, cable, phone, and
travel and entertainment.
And remember, homes have other
costs, too, such as utilities,
maintenance and repairs, that
may not exist if you rent.