Lenders use mortgage ratios to determine how much they will allow for a home loan. The ratios are a good starting point, but can lead to trouble if that is all you consider.
The front-end ratio compares gross monthly income and percent that can be spent for a monthly housing payment. The monthly housing payment typically includes – Principal, Interest, Taxes, and Insurance (PITI). The percent deemed affordable varies but general range is about 28% – 33% of monthly income.
Example: Monthly income is $5,000 & using a 32% ratio. $5,000 x .32 = $1,600 for a mortgage payment
With a fixed rate mortgage you will know the amount needed for principal and interest each month, but property taxes and insurance tend to increase each year. So over the course of the loan your mortgage payment is likely to increase. Mortgage payments can become unaffordable if income does not keep pace with inflation.
Back-end ratio compares total monthly debt to income. Debt will include student loan payments, credit card payments, and auto loans. Percent deemed acceptable generally ranges from about 36% – 42%.
Example: Monthly income is $5,000, a $1,600 mortgage payment & using a 41% back end ratio. $5,000 x .41% = $2,050.
So $2,050 total debt – $1,600 PITI = $450/month for all other debts.
After you look at the ratios, take a look at your budget. Compare take-home income and current expenses. Consider costs of home maintenance, your likely future income, and whether you plan to stay in the home long enough to build equity. Does home ownership fit into your current budget and probable future budget?
For more information about mortgages view a recording of the UF Extension Mortgage Readiness webinar at https://attendee.gototraining.com/878nx/recording/2904517584632944130