Mortgage Debt to Income Ratio – A Rule of Thumb
Mortgage Debt to Income Ratio – Ever ask yourself “How much house can I afford?” Just a word of warning – I am NOT a banker or financial analyst. I have owned a home. I found a way to get a mortgage that I truly could not afford. Finally, I signed my house over to a family member that rented it and eventually sold it. My loss. They lost money on it too.
Since that time – I’ve decided there are many ways to get into a house but only a couple ways to afford being a home owner.
Not a banking formula but worth keeping in mind when you get it in your head that you should buy a house. A fixed rate 15 year mortage with a monthly payment equal to or less than 25% of your monthly take home pay. If you stray outside of this basic formula then don’t be surprised when you find yourself in over your head. Remember this formula: A fixed rate 15 year mortage with a monthly payment equal to or less than 25% of your monthly take home pay.
Fixed rate to protect you from variable rates that can go well out of your budget or balloon payments that can wipe you out financially.
Whether or not you choose a 15, 20 or 30 year mortage – make sure you have enough room in your budget to make a 15 year mortgage payment. This gives you the choice of paying your mortage off early once you are debt free without strapping you for cash.
A monthly mortgage payment that is equal to or less than 25% of your take home pay is a much smarter mortage to income ratio because it gives you room.
Although a bank or finance company may use your gross pay to “qualify” you for a mortage – that doesn’t mean you can afford it. Use your net pay and don’t go higher than 25% of your net pay to come up with your ideal mortgage payment.
Here’s an example: A 15 year mortgage on a $100,000 home at an interest rate of 5.75% will have a monthly mortgage payment of $830. In order for you to be able to afford a $100,000 home you need to be taking home about $3,500 a month.
Income not there and you want more house? You have a literal target to shoot for with your own income. It’s near impossible to reach a target until you have one. Now you have a personal goal to work toward.
As you can see if you want to lower your monthly payment – don’t go for a longer mortgage – instead, grow your down payment.
Remember, once you become debt free – you will have more money each month to save for your future home. Trying to shave off the time it takes to get into the home of your dreams by settling for less than this formula is NOT the best way to own a home.
Speaking from experience – it’s much tougher to lose a home you love. Stay focused and plan well – you will be able to enjoy your new house more in the long run.
Want to play with the numbers? You can use Bankrate.com’s mortgage calculators here
Tammy
Tags: debt, how much house can i afford, mortgage calculator, mortgage income ratio
