BUSINESS FUNDAMENTALS
STARTING OUT
First Properties THE MATH BEHIND THE QUESTION: HOW MUCH CAN YOU AFFORD?
by Michael Jordan
F
percent of your income on housing expenses and no more than 36 percent on total debt. FRONT-END RATIO This ratio is the percentage of your yearly gross income dedicated to paying your mortgage on a monthly basis. In other words, this compares your monthly housing costs to your monthly income. In the past, lenders required homebuyers to have PITI (principal, interest, taxes, insurance) not exceeding 28 percent of the gross income. This meant that for an income of $25,000, the homebuyer should allocate no more than
or a first-time buyer, whether as a homeowner or investor,
compares your monthly minimum debt payments to your gross income. The higher your DTI, the harder it will be for your lender to approve any financing options, much less a good interest rate. This can be further be divided into two components: the front-end ratio and back-end ratio . It’s important to know a popular rule of thumb when it comes to determining how much you can afford. It is commonly known as the 28/36 percent rule . The purpose of this is to make sure that you have enough legroom in your finances in case of an emergency or unexpected expense. This rule suggests that you should spend no more than 28
thinking of how much you’re willing to spend can be an effort to ensure that this purchase is suitable to your budget. You might think to spend ‘just a bit more’ for a better property, which can upend your budget. There are basically three factors you need to consider in determining whether you can afford the house you want: Debt-to-income (DTI) ratio, down payment , and credit score .
DTI RATIO To fund your purchase, lenders look at your DTI ratio, which
52 | think realty magazine :: may 2020
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