Calculating how much house you can afford

There are two ratios that lenders look at to determine how much house you can afford.

1. The first, called the front or top ratio, is simply the ratio of your housing expense
to your gross income. It’s calculated by:
Gross monthly income $7,240 X .30 = $2,172

2. The bottom or back ratio is all of your recurring debts including house payment subtracted from your gross income. This is calculated by:
Gross monthly income $7,240 X.41 = $2,968 monthly recurring debts:
Car loans $545.00
Credit Cards ($150 X $75) equals $225.00
School loans $190.00
Child support $ -0-
Other debts $ -0-
Total monthly debts $960.00
Subtract total debts ($960) from the result of multiplying your gross monthly
income by .41. This equals $2,008.


The lesser of front and back ratio ($2,008) is the amount of the total house payment you can qualify for that includes taxes, insurance, principal, interest, and PMI. The next step is to subtract the taxes, insurance, and PMI to get the principal and interest payment. Since taxes, insurance, and PMI account for roughly 20 percent of the payment, multiplying $2,008 X .80 equals $1,606.
If you have a financial calculator, key in $1,606 for the payment, 6 percent interest on the interest key, and 360 payments (30 years) on the term key. Then hit the PV (present value) or loan amount key, and you’ll get $267,934. Add in the down payment of $29,763, and you’ll get $297,630 as the house price you can write an offer on.
You can also go to www.mortgagexpo.com and click on calculators, then click on What house can I afford? Enter the total payment amount and the calculator will figure out your house price.