Understand Housing and Debt Ratios!
When it comes to purchasing a home, you never want to put yourself in a tough financial situation. Figure out what you can afford before you go house hunting. This way, your dream home is never out of reach.
There are a few ratios you can use to see just how much house you can afford:
• Housing-to-Expense: This ratio will tell you how much of your gross monthly income is available after expenses. A monthly mortgage payment will include your home loan’s principle, homeowners insurance, and taxes. To keep financial strain at a minimum, you don’t want your monthly mortgage payment to take up more than 39% of your monthly salary. Therefore, multiply your annual salary by .39 and divide the result by 12 (representing the 12 monthly payments you will make each year). The figure will show you the highest housing-to-expense ratio that you can afford.
• Debt-to-Income: This ratio tells you how much of your monthly salary goes toward expenses. This is any debit to your account, including a current rent or mortgage payment. To feel comfortable, we recommend your debts allocate for no more than 43% of your monthly income. Multiply your annual salary by .43 and divide the result by 12.
• Loan-to-Value: This ratio helps determine whether a mortgage banker will approve you for a loan. When purchasing a home, you will be asked to provide a down payment of at least 5% of the home’s value. Therefore, you are asking the banker to finance 95% of the home purchase. If you want to eliminate the insurance requirements that comes with mortgages, you’ll need to put down 20% which leaves you with a loan-to-value ratio of 80%.