There are so many people that have thought about buying and owning their own home but don’t think they can afford it. Surprisingly though, mortgage payments can be lower than rent payments while at the same time creating wealth with ownership. But if you’re of the notion that you can’t afford a home but you’re renting now, let’s pull back the curtains a little bit and show you how lenders determine affordability.
First, lenders take into consideration your gross monthly income. Not take-home income, but the amount before any deductions are taken out. Then, the lender looks at any monthly credit obligations you may have such as a car payment or a credit card payment. Items that won’t appear on a credit report such as food or utilities are not included in the affordability factor. Lenders then calculate a mortgage payment that would be approximately one-third of gross monthly income using today’s interest rates. In this payment is included principal and interest, an amount for property taxes and insurance. Lenders refer to this as PITI. This ratio is also referred to as your “front ratio.”
Next, lenders then add up your monthly credit obligations to your PITI and compare that to your gross monthly income as your “back ratio.” This ratio should be somewhere in the neighborhood of 40-43% of gross monthly income. If your gross monthly income is $6,000 per month then your total monthly payments should be around $2,600.
Take a look at your gross monthly income and add up your monthly payments and then look at what you’re now paying in rent. Our guess is you’re paying more now in rent than what you could be paying with a mortgage.
It doesn’t take much to speak with a loan officer over the phone who can give you an idea of what you could qualify for. If you’re not sure you can afford a home, it only takes about 10 minutes of your time to find out. You’ll be surprised.