How much mortgage can you afford?

To determine your maximum mortgage amount, lenders use
guidelines called debt-to-income ratios. This is simply the
percentage of your monthly gross income (before taxes) that
is used to pay your monthly debts. Because there are two
calculations, there is a "front" ratio and a "back" ratio, and
they are generally written in the following format: 38/50.

The front ratio is the percentage of your monthly gross
income (before taxes) that is used to pay your housing costs,
including principal, interest, taxes, insurance, mortgage
insurance (when applicable) and homeowners association
fees (when applicable). The back ratio is the same thing,
only it also includes your monthly consumer debt. Consumer
debt can be car payments, credit card debt, installment
loans, and similar related expenses. Auto or life insurance is
not considered a debt.

A common guideline for debt-to-income ratios is 38/50.
However, some programs will allow as much as a 45/55
ratio. A borrower's housing costs consume thirty-eight
percent of their monthly income. Add their monthly consumer
debt to the housing costs, and it should take no more than
fifty percent of their monthly income to meet those
obligations.

The guidelines are just guidelines and they are flexible. If you
make a small down payment, the guidelines are more rigid.
If you have marginal credit, the guidelines are more rigid. If
you make a larger down payment or have sterling credit, the
guidelines are less rigid. The guidelines also vary according
to loan program. FHA guidelines state that a 29/41 qualifying
ratio is acceptable. VA guidelines do not have a front ratio at
all, but the guideline for the back ratio is 41

Example: If you make $5000 a month, with 50% DTI
qualifying ratio guidelines, including your consumer debt,
your monthly housing and credit expenditures should be
around $2500 as a maximum.