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“What is the price of home I can afford?” To begin answering this question, lets talk a little DTI!!!
Your DTI, or debt to income ratio, is equal to your monthly debt obligations, divided by your monthly gross income. Some examples of categories of monthly debt obligations lenders consider when determining your DTI include credit cards, auto loans, student loans, personal loans, child support, or any loans where you are a co-signor.
Let’s say a couple combines to earn $7,000 per month in pre-tax, monthly gross income. And they also have a car payment that costs $525 per month, student loans that cost $225 per month, and a credit card that has a minimum required payment amount of $30. To determine their DTI, here are the steps, and remember, we’re doing this because we’re trying to discover how much a house payment can they afford.
So…MATH TIME!
Add together all of the aforementioned monthly debt obligations: $525 + $225 + 30…and what do you get? $780. Keep that number in mind, and set it aside for now. We’ll revisit it again shortly.
Though there is variation among lenders and the types of lending products they are offering, whether it’s FHA, USDA, VA, Conventional, or a Hud-184 Native American loan, a good rule of thumb is that lenders will want you to have a combined DTI of your monthly debt obligations, plus your new mortgage of less than 43%.
So let’s look back at the scenario we were working through. What’s 43% of the gross monthly income of our example couple? $7,000 x 43% = $3,010. So, in order to determine what a lender will be willing to approve them for on a monthly mortgage payment, we must subtract their monthly debt obligation of $780 from $3,010, and the difference will be the approximate monthly mortgage payment a lender will be willing to approve the home buyers for, and that amount would be $2,230 per month. That number must also include the homeowners insurance, and the property taxes. With that taken into consideration, this person can receive a pre-qualification letter for a mortgage of approximately $270,000.
Whew!!! We finally arrived at our destination. Now that you have an idea of what a lender is going to be willing to approve you for, let’s go find that house!
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