You may not have raced into adulthood, but here you are and there is no going back. You launched a career, stopped hanging out at the pub with your friends and have settled down in life. Now for the big step, it's time to buy a house. Understanding how much of your income can go toward a mortgage payment each month will help you feel more confident in your ability to succeed as a homeowner.
Mortgage lenders have one concern when it comes to giving you a house loan -- your ability to pay it off. While your uncle Joe may sympathize with your penchant for credit cards, the broker will not. He only wants evidence that if he pushes through your loan, you will be able to make the payments.
To ready yourself for a mortgage, pay down some of your debts. Not only does this help you qualify for the loan, it makes paying the monthly payments easier on your wallet each month.
A good way to know if you will be able to stick with a mortgage obligation is to start putting away the amount you think you will spend on a mortgage. If you can successfully put away a payment each month, while meeting your other obligations, you are more likely be able to handle a house payment.
Determining the Magic Number
As of 2010, lenders, do not want your mortgage payment to exceed 28 percent of your gross monthly income. Your gross income is how much money you are paid before any taxes are taken out.
The system used to calculate your ideal mortgage payment is called a front-end ratio.
Calculating Your Payments
In figuring out your front-end ratio, the lender takes into account the actual mortgage payment, interest on the payment, property taxes and your homeowner's insurance. The total of these factors should never exceed 28 percent of your pretax income each month.
To calculate what your maximum monthly mortgage payment should be, multiply your yearly salary by 0.28, then divide that number by 12.
Increasing Your Front-end Ratio
You can increase your front-end ratio by increasing your income. If you receive alimony or child support, you may include these payments on your loan application. You can work a second job for six months to a year before applying for a loan so your overall income is higher. Anything you can do to increase your regular, verifiable income helps increase your front-end ratio.
Candace Webb has been writing professionally since 1989. She has worked as a full-time journalist as well as contributed to metropolitan newspapers including the "Tennessean." She has also worked on staff as an associate editor at the "Nashville Parent" magazine. Webb holds a Bachelor of Arts in journalism with a minor in business from San Jose State University.