Peter McDougall
The restrictions on mortgage loans are legion these days. Knowing how much mortgage you can afford can help keep you focused on houses in the right price range and can better prepare you for the application process.
The amount of money you are qualified to borrow depends largely on how much of your monthly income goes toward your monthly mortgage payments. Small changes in your interest rate can boost your payments, which can result in qualifying for a smaller loan. Lenders use two separate guidelines to decide if you qualify for a loan: the housing-expense ratio and the total-obligation-to-income ratio. The housing-expense ratio compares your monthly income before taxes with your housing costs, which include your mortgage payment, real estate taxes, mortgage insurance (required if you make a down payment of less than 20%) and any association fees or dues. In general, your housing costs shouldn't surpass 28% of your income. The total-obligation-to-income ratio, meanwhile, includes your housing costs alongside other liabilities, such as long-term credit card debt, auto loans, student loans and alimony payments. Together, these monthly expenses should not surpass 36% of your monthly income. Any increase in your interest rate will raise your monthly mortgage payments, which will then require a larger income to keep the two ratios at the appropriate levels. Tracking these changes is easy with the help of the Mortgage Required Income Calculator from BankingMyWay.com. The calculator works by estimating the income you would need to earn, before taxes, based on the larger of the two ratios. To use the calculator, enter the desired mortgage amount, a starting interest rate and the term of the loan you are seeking. You must also enter details about your personal financial situation in the Liabilities and Housing Costs sections of the calculator.
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