Mortgage Affordability Analysis

Get the keys to a home you can afford.

When shopping for a mortgage, experts tell homebuyers not to bite off more than they can chew. Lenders use specific formulas to determine a borrower's actual buying power, which can help homebuyers make educated and financially responsible decisions.

Debt to Income Ratios

Debt to income ratios are used to determine a borrower's monthly payment eligibility. Using a formula of factoring gross income to total debt, a borrower's house payment should not exceed 28 to 31 percent of their income. Nor should homeowners or have debt outside of a mortgage that exceeds 40 percent of their income, says the Freddie Mac website.

PITI

PITI stands for Principal, Interest, Taxes and Insurance. This is the total house payment that the homebuyer is expected to make with property taxes and homeowner's insurance factored into their monthly mortgage payment. The PITI is also based on the formula for affordability used by lenders when reviewing gross income to debt ratios.

Expert Insight

According to information published on the Freddie Mac website, homebuyers who want to get a rough estimate of their home affordability should take their before tax income and multiply it by 2.5. This generates a rough estimate of the total amount of house they can afford. For example, a buyer who grosses $72,000 per year would multiply that by 2.5, giving a housing affordability estimate of $180,000. Yet, Freddie Mac advises homebuyers that this is a very rough estimate and should be used as a baseline, prior to speaking to a loan officer.

References

• Bloomberg: How Much House Can You Afford?
• Freddie Mac: How Much Can You Afford to Spend on a Home?
• Money Under 30: How Much House Can You Afford?