Determining how much you can afford to borrow for a new home is the first step in finding a property you wish to buy. This is something you should estimate on your own, but it’s also something that your mortgage lender will be very concerned about.
The first step in determining how much you can afford to borrow is looking at your debt to income ratio. Then after looking at your current debt level and your income it’s time to look at the front end and the back end ratios.
The front end is the cost of the house. Determining a front end ratio is looking at how much of your gross monthly income will go to your mortgage. This means your principal, interest, taxes and insurance payments. The goal is to have the front end that is ideally less than 28% of your gross income.
The back end is figured by looking at how much of your total gross income goes to all debts, mortgage included. The goal is to have your back end stay under 36% of your gross income each month.
Both of these, the front end and back end ratios, are examined before your mortgage broker decides on how much you can borrow. Use the following percentages to figure out an estimate of what you can afford before you see a broker and you’ll be better prepared for their results.