How Much of Your Monthly Income Should Your Mortgage Be?
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The Standard Ratio is 28 Percent
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According to Bankrate.com, lenders will approve a home loan only if the mortgage payment is what they consider realistic for the lendee. This means the monthly principal and interest payments, plus real estate taxes and homeowners insurance, does not exceed 28 percent of total monthly income. This is called the "front-end ratio." To calculate a maximum monthly payment, multiply annual salary by 0.28 and divide that total by 12.
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Consider Total Debt
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The "back-end ratio" is the total debt-to-income ratio. This means all other debts or obligated monthly payments--like car payments, child support, alimony, student loans and credit cards--are considered along with the actual expenses of the house, as outlined in the "front-end ratio." Total monthly payments should not exceed 36 percent of income.
Bottom Line
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The more affordable, the better--particularly when it comes to long-term obligations. A monthly mortgage payment--including payments on principal, interest, taxes and insurance--of 28 percent of gross monthly income is a relatively safe commitment for those with steady income. However, that percentage may need to be less if the lendee has other obligated monthly payments amounting to more than 8 percent of gross monthly income.
References
- Photo Credit house image by qadro from Fotolia.com
