How Lenders Determine What You Can Afford
Mortgage lenders use two main ratios to decide how much money to lend you. Understanding these will help you budget effectively.
1. Front-End Ratio (Housing)
This is the percentage of your gross monthly income that goes toward housing costs (Principal, Interest, Taxes, Insurance). Most lenders prefer this to be under 28%.
2. Back-End Ratio (Total Debt)
This includes your housing costs PLUS all other monthly debt payments (credit cards, student loans, car notes). The standard limit for this is 36%, although some programs like FHA loans allow it to go up to 43% or even 50%.
Tip: Boost Your Budget
Pay off a monthly debt like a car loan or credit card balance. Reducing your monthly obligations by just $300 can increase your buying power by over $40,000!
Don't Forget "Hidden" Costs
Your mortgage payment is just the start. When calculating your budget, remember to set aside 1-2% of the home's value each year for maintenance and repairs.