The Voice for Local Real Estate

How Much Can You Afford?

One of the first questions potential homebuyers should ask their mortgage lender before they beginning a home search is, “How much home can I afford?” The answer will be determined by how much you earn (income) and how much you owe (debt). When you finish reading this section, you can use a chart to figure out how much you can spend on a home.

Lenders consider a homebuyer’s gross monthly income when determining how much a buyer will have available to pay on his or her monthly mortgage payment. Income may include salary, seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, social security and alimony. Part-time pay, overtime and bonuses may also be considered. Lenders look for consistent income for at least the past two years. Gross income is not the amount you take home each month. Instead it is the money you earn before taxes are removed. Lenders look at your gross income and figure out how much you can spend on housing. You can figure out your housing ratio by dividing the amount of the mortgage payment by your gross income. FHA guidelines suggest that you should spend 29% or less of your monthly income on housing.

Lenders also look at the debt-to-income ratio. A buyer’s debt includes car payments and monthly installment loan payments, bank/credit union loans, student loan payments, alimony, child support payments, the minimum payment on credit cards. Not included in the debt payments are things such as utility payments, cell phone bills and groceries.

Lenders calculate the debt-to-income ratio by dividing monthly minimum debt payments (excluding mortgage or rent, utilities, food and entertainment) by monthly gross income. For example, if a buyer’s monthly debt of $1,000 is divided into his gross monthly income of $3,000, his debt-to-income ratio is 33%.

Debt-to-Income Ratio
(using gross figures)

------------ = _____ %


Housing Ratio

------------ = _____ %

For conventional loans, lenders typically require that buyers have a monthly mortgage debt of no more than 28% of their monthly income, and a total monthly debt of no more than 36% of their income. For FHA-insured loans, a buyer’s monthly mortgage payments (or housing ratio) should not exceed more than 29%, and total debts (debt to income ratio) should not exceed 41%.

The above ratios are guidelines, and lenders can approve buyers for larger or smaller loans based upon other factors such as assets, credit history, employment history, the type of loan requested, the value of the property and the amount of down payment. Lenders will typically approve buyers for the maximum amount that they can qualify. It is up to you to consider your lifestyle (whether you spend most of your time and money at home, traveling, shopping, or eating out), how much you can comfortably spend on your mortgage each month, and current and projected expenses. Click here to figure out how much you really can afford each month for your mortgage payment.

As you will notice while looking at the mortgage section of this guide, lenders will allow you to borrow up to a maximum amount. Loans have a dollar limit, and this limit can be based on the borrower’s income, the value of the home or even the county where the home is located. Your lender can tell you more about loan limits.

Information in this section was compiled from “Realizing the American Dream,” a workbook for homebuyers from the American Bankers Association, National Foundation for Consumer Credit, and Neighborhood Reinvestment Corporation.

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