The General Guideline



According to real estate agents and experts, prospective homeowners are capable of getting and paying for a property that costs two hundred and fifty per cent (250%) of their annual income.

Following this guideline, a person who earns five thousand dollars ($5,000.00) every month can earn sixty thousand dollars ($600,000.00) a year. Therefore, he can eventually afford a house that costs as much as a hundred and fifty thousand dollars ($150,000.00).

However, this guideline is only a primary consideration. People should consider other factors before actually getting their own mortgage. Other than the general guideline, prospective homeowners should first consult their mortgage lenders.

The Lender's Point-of-View

If you are a prospective homeowner, you should seriously consider the advice of your mortgage lender before choosing a home. Basically, the lender applies real estate formulas in computing for your mortgage capability.

Front-End Ratio

The front-end ratio refers to the percentage of your annual gross income that you can dedicate for your monthly house payment. This will be based on the PITI (Principal, Interest, Taxes, and Insurance) and your monthly income.

Note that mortgage payment is composed of four factors: The principal amount of the house, the interest rate, the taxes, and the house insurance. In general, if the PITI will not exceed twenty eight per cent (28%) of your annual gross income, then you will not be house poor. However, some mortgage lenders will still consider a PITI rate of thirty (30%) or forty per cent (40%).

Back-End Ratio

This is another name for your debt-to-income ratio. This means that your lender will examine your monthly gross income in relation to your debts, which appear in your actual credit report. Debts that will be taken into account are your credit card payments, utility expenses, outstanding loans, child support, and your prospective mortgage.

The general rule is that your debt payments should not exceed thirty six per cent (36%) of your monthly gross income. To simply calculate for this ratio, you will have to multiply your monthly gross income by 0.36. That means that if you earn five thousand dollars ($5,000.00) a month, your debt payments should not exceed one thousand eight hundred dollars ($1,800.00).

Down Payment

For every home that you are planning to purchase, you will have to prepare a down payment first. The usual rate for the down payment is between twenty (20%) and thirty per cent (30%) of the actual price of the home.

The higher the down payment that you can provide, the lower the house insurance fees become. Also, the amount of the down payment will eventually affect your front-end and back-end ratios because it affects the monthly house payment that you are going to make.

Basically, the greater the amount of down payment that you can provide, the more credit-worthy you become. As such, you can get more expensive homes and lesser interest rates for mortgages. However, if you have a very high credit score, some mortgage lenders will actually offer you one hundred per cent (100%) financing mortgage. This means that you will not have to prepare for down payments.