HOW MUCH HOUSE CAN I AFFORD?
The 28%-36% rule and the 43% rule are considered by lenders to be guidelines rather than strict requirements. Anywhere between 25% and 28% of monthly income should be spent on housing. For example, if $4,000 is brought home per month and multiplied by 28%, a monthly mortgage payment of approximately $1,100 could be afforded. Alternatively, it is sometimes suggested that the front-end ratio be used, in which housing expenses are set at 28% of gross income, with 36% allocated as the back-end ratio — representing total debt service, including housing costs. This ratio is referred to as the debt-to-income, or DTI, ratio.
An DTI of up to 43% is typically accepted by many lenders. For a Freddie Mac, Fannie Mae, the FHA, the VA, or the USDA, a mortgage must have a DTI of 43% or less.
When affordability is being calculated, it should be remembered that the monthly financial commitment includes more than just mortgage payments. Payments should be low enough that the desired lifestyle can still be maintained. Expenses such as student loan payments, entertainment, groceries, car payments, credit card debt, and savings should also be accounted for.
In addition to income and DTI, lenders consider your credit history and credit score: The higher the better. You might enjoy more favorable loan terms or get a better interest rate. They are also interested in your cash on hand, your savings, and your down payment money.
