Shopping for a home can be an exciting time in ones life. There are so many things to consider; how many rooms, how many bathrooms, the neighborhood and the school district. However, perhaps the most important consideration is how much house one can afford. The general rule of thumb is that most homeowners can afford a mortgage loan that is 2-2.5 times their gross income. This means a family with a household income of $100,000 could probably afford a $200,000-$250,000 home. Of course this is generalization. There are other factors to take into consideration.
When lenders are considering potential buyers they look at more than just their gross income. They also look very closely at the buyers front-end and back-end ratios, as well as the amount of the down payment they can afford. We will take a closer look at what these factors are and why they are important.
1. Front-end ratio: The front-end ratio is the percentage of ones gross income that will go towards the monthly mortgage payment. The mortgage consists of principle, interest, taxes and insurance. Most lenders dont want to see the front-end ratio higher than 28%. This means that the mortgage payment should...
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