If you’re like most people, a house is the biggest purchase you will make in your lifetime. Spending too much on a home could interfere with other financial goals, such as retirement and college savings. It is best to determine what you want and can pay on a mortgage before you start looking.
To qualify for a home loan, lenders will look at your front-end ratio and back-end ratio. Your front-end ratio determines how much you will be spending on principal, interest, taxes and insurance in comparison to your gross monthly income. Generally, a lender will want your front-end ratio to be below 28 percent of your gross monthly income.
Back-end ratio not only considers your principal, interest, taxes and insurance but the debt you owe, such as student loans, credit card debt and automobile loans. Ideally, this ratio should not surpass 36 percent of your monthly gross income.
Apart from the income to debt ratios your loan must meet, the amount of your mortgage should also reflect what you personally are comfortable paying. If an unexpected cost arises, are you still going to be able to make your mortgage payment? What are your plans for the future? If you are a currently a dual-income family, is there a possibility children may eventually change that? We usually recommend that you have some reserves in the case of unforeseen circumstances of six months’ worth of bills and mortgage payments, but reserves are not required to obtain a mortgage.
To be sure you are shopping in the appropriate price range, contact a mortgage lender first. By getting a you loan commitment while shopping, you can be confident that your home pick coincides with your financial abilities and goals.
Looking for more information on buying a home? Our Mortgage 101 Handbook is the ultimate guide for First Time Home Buyers.