What Is the Correct Percentage of Income for a Monthly Mortgage Payment?
Buying a home is one of the largest financial investments most people make. Before you start looking for a loan, you should estimate how much you can afford, based on the ratios lenders use in determining your maximum loan amount.
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Front-End Ratio
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The front-end ratio divides your monthly mortgage costs--including the mortgage payment, real estate taxes and private mortgage insurance--by your pretax monthly income. Most lenders do not want the result to exceed 28 percent, according to Bankrate.
Back-End Ratio
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The back-end ratio divides your monthly debt expenses--including your mortgage, any student loans, car loans or personal loans--by your monthly pretax income. Most lenders do not want this ratio to exceed 36 percent, according to Bankrate.
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Considerations
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Some lenders may allow you to exceed these limits, according to Investopedia. Before you jump at the opportunity to borrow more money, don't forget to include regular monthly expenses, like groceries and utilities, in your own calculations of what you can afford. Also carefully consider what areas of your budget you will have to reduce and how you would pay for emergency expenses that could arise.
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