Qualifying Ratios

The amount of loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a "safe" amount for your mortgage payments. A fairly standard ratio is 33/38. Certain mortgage plans sometimes use more liberal ratios - for example, the FHA currently uses 29/41.

Front Ratio

Here's how it works: With a 33/38 ratio, the 33 is called the front ratio. This is the maximum percentage of your monthly gross income a lender would like to see you spending on your monthly housing costs, including principal, interest taxes, insurance and any Homeowner's Association fees. Even if you don't pay your property taxes and homeowner's insurance monthly as part of your mortgage payment, the lender will calculate it as if you do when determining your ratios.

Back Ratio

The 38 is called the back ratio. The lender adds your monthly consumer debt (car payments, credit cards, etc.) to your monthly housing costs, and determines how much you spend on these obligations as a percentage of your gross monthly income. A 38 back ratio means that, as a maximum, this figure should be thirty-eight percent of your monthly income.

For example, if you make $5,000 a month, your maximum monthly housing cost should be around $1,650. Your consumer debt, your monthly housing and credit expenditures should be around $1,900 as a maximum.

The Rest is Easy - Sort of

Once you know your maximum payments, you just start subtracting. You have to do a little estimating, too. Estimate what your monthly taxes and insurance will be and subtract them from your maximum payment. That leaves you with the principal and interest payment. Then you just add in your down payment and you know how much house you can afford.

Advice

• Contact a qualified lender and let them determine your maximum price.
• Contact me so I can put you in touch with a qualified lender, one who has a reputation for dependability, reliability, good interest rates and programs.
• Look at my mortgage section.

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