How Much Salary Should You Have for a Home Loan?

Front-End Ratio

The front-end ratio is a measure of what percent of income is going toward a home loan. Many home finance experts agree that this front-end percentage should never exceed 28 percent of monthly income. Calculate this maximum by multiplying the annual salary by 0.28 and then dividing by 12. For example, an individual with an annual income of $50,000 should have a home loan less than $1,166 per month, according to this guideline.

Back-End Ratio

An alternative way of determining how much salary is necessary for a loan is the back-end ratio. This method considers all debt, not just the mortgage, and compares the total debt to the available income amount. The general rule of thumb is that the back-end ratio should be less than 36 percent. Calculate the back-end amount by multiplying the yearly salary by 0.36 and dividing this by 12. For a person with a $50,000 annual salary, the result is $1,500. If the individual has $700 in monthly expenses such as a car and insurance, $800 of monthly salary is left for a home loan.

Bottom Line

The decision of how much of a salary to dedicate toward a home loan is a personal choice. Both the front-end and back-end ratios can be starting points for making a decision. Some borrowers who have a higher financial risk tolerance will choose to spend a high percentage of their salary on a home, while others are more financially conservative and will spend less.

References

• All Business: Home Loan Debt to Income Ratios
• Bankrate: Salary and Mortgages
• Money Instructor: Debt and Salary Ratios