Home Buying
Housing Ratio
Now that you have your monthly income,
you can calculate your housing ratio. The housing ratio is the amount of your monthly
income that goes to pay your housing payment. A housing ratio of 28% or less is
considered ideal.
Multiply your monthly income by .28 (or 28%). That's
the maximum amount a lender would generally say should go toward your total monthly
housing expense.
In our example above, the lender would want to see
a total monthly payment of no more than $606.48. ($2166 in monthly income x .28
= $606.48)
Keep in mind that monthly housing expense doesn't
just include the loan payment. It should also include taxes and insurance, and condo
fees if there are any. You can ask a real estate agent to estimate those costs for
you in your price range.
Summary of housing ratio:
Monthly income x .28 = Maximum Monthly Housing Payment
Your Monthly Payment
With most loans, the lender will escrow your taxes
and insurance. That means they'll collect a portion of them with each monthly payment.
That results in a monthly payment often referred
to as "PITI" - principal, interest, taxes, and insurance.
Principal - the amount that goes toward paying off
the loan balance
Interest -- interest on the balance
Real estate Taxes -- taxes required by local governments
Property Insurance -- insurance required by the
lender in case the property is damaged by fire, hurricanes, flooding, etc.
Lenders will generally charge a slightly higher
interest rate if you want to "waive" escrows, or pay them yourself.
Debt Ratio
In addition to your housing ratio, lenders will
look at your total debt ratio. Here, they want to see that your total debts, including your monthly housing ratio plus your payments on your other debts, don't exceed
36% of your monthly income.
To calculate your total debt ratio, you'll need
to add up your monthly debt payments including:
· Car payments
· Minimum required payments on credit cards
· Minimum payments on student loans
· Child support or alimony you pay
· Minimum payment on any other debt that appears
on your credit report
Add these to your monthly housing expense to get
your total monthly debt payment and check to check that it doesn't take up more
than 36% of your monthly income. If it does, you may need to pay down debts or aim
for a less expensive home to reduce the housing portion of the ratio.
If your ratios are higher than 28%/36% that doesn't
mean you can't buy a home. Some lenders will lend to borrowers with debt ratios
of 55% or higher! It does means that you will likely pay a higher interest rate
because the loan is considered more risky.
A word to the wise: Homeownership is always more
expensive than people realize. When you rent, the landlord is responsible for most
of the minor - and all of the major - repairs to your home. When you own a home,
it's up to you to pay for any repairs. Whether it's a leaky toilet or roof, or a
fridge that goes on the blink you'll have to take care of it yourself. That can
get very expensive very quickly. It's a good idea to get your debt under control
and buy a home that will remain affordable.
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