Before you start searching for your new house, it0s a good idea to know what size mortgage you can afford. You don0t want to be in a position where you find the perfect house, bid on it, and only find out later that you can0t afford the mortgage. Determining your mortgage affordability is rather easy and it will give you the assurance you need in choosing the right home for your pocketbook.
To calculate your maximum mortgage amount, lenders use the debt-to-income ratio concept, or DTI. It measures the percentage of your monthly income, before taxes, that goes towards paying your long-term debts. The DTI consists of two percentages 0 the front ratio and the back ratio. The standard industry ratio is usually set at 28/36.
The front ratio
This ratio refers to the top number of the DTI. It describes the maximum percentage of your monthly gross income that can go towards housing expenses. It includes costs such as private mortgage insurance, homeowner0s insurance, and property taxes. In the above example, 28% of your monthly gross income can go towards a mortgage. Let0s say your monthly pre-tax income is $6,000. Multiply that number by .28 ($6,000 x .28 = $1,680), and […]

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