How Much Income Do I Need for a Home Loan?
The first consideration when purchasing a home is affordability. In addition to the mortgage, there are property taxes, insurance, maintenance and possibly association fees to manage. The question isn't whether or not you can get a home loan with your income, it's how much that loan will be, and what sacrifices you're willing to make to be a homeowner.
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Debt Ratios
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The primary tool that banks use to determine how much they're willing to lend you is the debt ratio. In general, your housing payment, which includes your mortgage, taxes and insurance, must not be more than 28 to 31 percent of your gross income, or the amount of money you earn before taxes. In expensive areas, this percentage is increased to 35 percent, and is referred to as the "front" ratio.
In addition to the housing allotment percentage, banks consider how much additional debt you have, such as car payments, student loans and credit card debt. The total of the housing plus additional debt, known as the "back" ratio, cannot exceed 36 to 43 percent of your gross income, depending on what kind of loan you are getting.
Debt Calculators
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Your down payment, interest rate, mortgage term, property taxes, insurance and association fees all affect your debt ratio. If you put down a large percentage of the selling price as a down payment, your mortgage and possibly your interest rate will be lower, resulting in a lower debt ratio. The easiest way to estimate your payment is to use an online calculator, which are available for free on several websites. Alternatively, a mortgage broker should be able to calculate this number for you.
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Other Considerations
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Owning a home goes beyond getting and paying the mortgage. Remember that homes require upkeep that often costs thousands of dollars. Your payment will also increase over time as your property taxes increase. Of course, you may qualify for a better interest rate in the future and may refinance, which would result in a lower payment. You may also make additional payments during the year, which would reduce your interest expense and shorten the life of the loan.
Banks also offer escrow services to assist homeowners in budgeting for insurance and property taxes. In an escrow program, the homeowner pays taxes and insurance in 12 equal installments but earns interest on the money. The bank pays the bills when due on behalf of the homeowner.
Resources
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Help for homeowners is easy to find on the web and is free of charge. The National Foundation for Credit Counseling offers free advice to those considering purchasing a home. Also, the Federal Housing Authority sponsors government-backed programs with traditional lenders. These FHA programs qualify buyers with smaller down payments and less-than-perfect credit. Interest rate information is also widely available; however, the rate you pay will largely depend upon your creditworthiness as well as your down payment and the amount you'd like to borrow.
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References
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