How Much House Can I Afford?

June 29, 2020

This is a common question for us in the mortgage lending business. It’s a simple question and concept, but there are certainly some details. As they say, the devil is in the details. One of the first things I always ask a prospective buyer is whether or not they pay rent, and if so, how much. That’s always a good starting point. There are several misconceptions out there and the monthly payment being un-affordable is one of them. Let’s talk about a couple of things. I won’t say facts, because there are always exceptions. However, in most cases rent is same or higher than a mortgage for the same or similar sized property. I can do a rent vs own analysis for you at any time and give you some confidence that you can afford the payment.

What is DTI

In mortgage lending, the most commonly used factor to illustrate affordability is the debt to income ratio. This ratio has evolved over the years, but at its core is a percentage of debt to income, usually referred to simply as debt ratio or DTI for short. Historically the debt ratio guideline was 28/36. The front ratio is the housing ratio, and the second number or back is the total debt ratio. The second number is the most important, but there are times when the first number has importance.

Technology advances have expanded that guideline and in some cases today the ratio can be expanded to 45%, or higher on some FHA programs. A mortgage lender will look at your projected house payment divided into your gross monthly income. That’s the “front ratio”. Additionally a lender will add up all your monthly debts and divide into that gross income for a “back” ratio. For easy math, let’s take a $60,000 annual salary, and a rough estimate for renting a 4 bedroom home in Douglasville (rent numbers provided by Zillow). Gross income is $5,000 a month and house payment is $1,500. The $1,500 payment divided by $5,000 monthly gross income is a 30% front ratio. ($1500/$5000). Depending on your credit score and the programs available that $1,500 monthly payment could equate to a $175,000 – $200,000 mortgage. We have to analyze the total debts and ratio as well, but this illustration is designed to show that if, renting, you are likely paying a similar or even higher number than it costs to buy the same property.

So, I can afford it, what now?

Now that you have an educated idea as to what you can afford or be comfortable with payment wise, let’s talk next steps. Reach out to me, and let’s get prequalified. I can discuss this ratio, pull credit and see what programs are available. We can help with a budget, and discuss your short and long term plans that could impact the home buying process. There is a lot to consider when making a purchase like this, but with professional guidance and a little patience, you can achieve the dream of home ownership easier than you think.

Shea Shoemaker
Author: Shea Shoemaker