What is Debt to Income Ratio?

How do I know how much home I can afford to BUY?

So you’re ready to take the plunge? The All American Dream of homeownership! Wait! How do you know how much home to look for, if you don’t quite know what you can afford? This is a common concern that reflects you’re using the smart approach in reviewing this investment so that you don’t get over your head in financial obligations.

First, your housing payment should be within 30% of your gross monthly income. When calculating try to use just your base income only and don’t count bonus or overtime. That way bonus and overtime can be used for savings or enjoyment instead of being obligated before it is earned. (It gets a little more complicated if you’re self employed, as net income, instead of gross income is used).

A. So, if you make $30,000 per year. That would be 2,500 gross per month. 30% of 2,500 is $750. (or your max housing).*
B. Paid Hourly? 12.00 per hour x 40 per week x 52 weeks divided by 12 months = 2,080. 30% of 2,080 is $624 (max housing).*

Monthly Housing Allowance Purchase Price Ability**
$ 650 - $ 800 $ 95,000 - $120,000
$ 800 - $1,000 $120,000 - $155,000
$1,000 - $1,250 $155,000 - $190,000
$1,250 - $1,500 $190,000 - $220,000
$1,500 - $1,750 $220,000 - $260,000
Based on general fha 30 year fixed loan at 4.5% including estimated escrows. For other calculations

Next, your overall sum of monthly debt obligations, (that is your new housing payment, car payments, student loans, credit cards and other loans, including child support) should not exceed more than 40-45% of your gross income. Sometimes your total debt ratio may be lower than this, especially if you have children.

A. Total “other debt” from A borrower above would be $325 (+ house=43%)
B. Total “other debt” from B borrower above would be $270 (+ house=43%)

Finally, if you’re preapproved for a monthly housing payment that is more than you pay now, try to set aside the difference each month for a few months as a test to see if you’re financially comfortable doing so. If you just don’t think you will feel comfortable with your preapproved amount….you can always buy less. Remember, you’re first building equity and security for you and your family’s future. This could be the first of many homes throughout your lifetime. Let us make it easy for you! Apply now

For more information visit us at www.guarantytrust.com

Or check out the following sites:

http://www.usnews.com/usnews/biztech/tools/modebtratio.htm

http://en.wikipedia.org/wiki/Debt-to-income_ratio

http://homebuying.about.com/od/buyingahome/f/030508_Affordab.htm

Sherry.Carney@guarantytrust.com