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How Much House Can You Afford?

Mortgage lenders are chiefly concerned with your ability to repay your mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment, which generally runs anywhere from 5 percent to 20 percent of the purchase price of the home.

So how much house can you afford? You can easily calculate the answer using two standard debt-to-income ratios:

The housing expense, or front-end ratio, shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing expense, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense.

The total debt-to-income, or back-end ratio, shows how much of your gross income would go toward all of your debt obligations, including mortgage, car loans, child support and alimony, credit card bills, student loans and condominium fees. In general, your total monthly debt obligation should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.

Let's take a home buyer who makes $40,000 a year. The maximum amount available for a monthly mortgage payment at 28 percent of gross income would be $933. However, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200.

The following chart shows your maximum monthly mortgage payment and maximum allowable debt load based on your annual gross salary:

28% Of
36% Of
Taxes and Insurance

In addition, lenders include the cost of taxes and insurance when calculating how much house you can afford:

Real estate taxes: Because property taxes are part of your monthly mortgage payment, it is important to get an estimate of what yours would be. Ask your real estate agent or tax office for the rates that apply in the area you want to buy.

Homeowners insurance: You must insure your property to obtain a mortgage. You can get an estimate of insurance costs from your insurance agent or a major insurance company in the area where you are house hunting. Be sure to inquire about special requirements for hazard insurance, such as mandatory coverage for floods, earthquakes, or wind in coastal areas. If you put down less than 20 percent of your home's value, you also will have to obtain private mortgage insurance (PMI).

Here's a look at typical debt ratio requirements by loan type:

Conventional loans
Housing costs: 26-28 percent of monthly gross income
Housing + debt costs: 33-36 percent of monthly gross income

FHA loans
Housing costs: 29 percent of monthly gross income
Housing + debt costs: 41 percent of monthly gross income


Armed with the above information, check out my mortgage calculator to see how much you can afford.