By understanding your debt to income ratio (front end and back end ratios) you can easily anticipate how much money a lender will let you borrow.
More importantly, knowing how to analyze your debt to income ratio can help you make the necessary financial changes to secure a better mortgage loan.
To find this out all you need is a good online mortgage calculator.
For example, did you know that if you and your spouse each makes 45k annually, you may qualify for a $287,000 mortgage? Maybe even over $300,000? You'd be amazed at what you may be able to afford.
Of course credit score is a big part of the equation but we'll assume in this article your credit is good.
If your planning on a buying a home, understanding your debt to income ratio is critical in planning - it tells the lender that after paying all your bills you have enough money to be comfortable and enjoy life, in other words your not "house poor" ( big mortgage payment and no left over cash at the end of the month.
) Let's look at the components of debt to income ratio and what numbers to plug into the mortgage calculator: Income First, take your gross annual income plus your spouses (if you're married) and add it together.
Next add any income from outside your jobs: interest income or child support perhaps.
Expenses Next, add up your monthly ongoing bills.
This includes: car payments, credit card bills, monthly medical bills, student loans etc..
..
Next, determine your annual property taxes in the neighborhood you plan on living in.
(Estimate if you don't know) Also determine what your annual homeowners insurance will be.
(Estimate if you don't know) Loan Terms Next, determine the terms of the loan you anticipate being approved for.
For example a 6% loan /fixed rate mortgage over 30 years.
Hypothetical debt to income scenario Total gross annual income (both spouses): $90,000 Total monthly debt (auto payments, credit card etc) $700 Annual taxes: $2800 Homeowners ins: $500 Interest rate: 6% Length of loan: 30 yr Entering this data into a good online mortgage calculator you'll see the result: the maximum loan amount will be about $287,715.
or $1,725.
Monthly PITI.
This is realistic figure based on a 36% back end ratio.
What if you had less debt, can you get a larger loan? Say you had no car payment and which brought your monthly debt down to $250 (a credit card payment and a student loan) Your new maximum loan amount will be $362,771 or $2175 towards PITI.
This big jump in potential buying power is achieved without increasing your income at all - only reducing your debt! Why not experiment with a good online mortgage calculator? The web site at the bottom of the page has a great free mortgage calculator which gives you all the above data to easily analyze your home buying situation.
You'll be surprised at what you may be able to afford.