How Much Home Do I Qualify For?
To answer the question, "How much home do I qualify for?" we have to just look at some fairly simple math. Realize that there is a difference between "how much home can I afford?" and what a mortgage broker will tell you that you can qualify for. Often times these terms are mistakenly considered the same thing.There are two different main classifications of mortgages, FHA and Conventional. They each have different qualifications.
Debt Ratios
FHA Loans
- The Front End Ratio for an FHA loan must not exceed 29%
- The Back End Ratio for an FHA loan must not exceed 41%
Conventional Loans
- The Front End Ratio for a conforming conventional loan must not exceed 28%
- The Back End Ratio for a conforming conventional loan must not exceed 36%
- A non-conforming conventional loan can be outside of the ratios listed above
Front End Ratio
To calculate the front end ratio you add the monthly mortgage payment and all escrow deposits for things like insurance, taxes, and HOA fees. Then divide that total by your gross monthly income. The result can not be higher than 29% for an FHA loan.So if your gross monthly salary is $4,000,
then your monthly mortgage payment
(including insurance, taxes, and HOA fees)
could not be higher than
$4,000 X 29% = $1,160.
then your monthly mortgage payment
(including insurance, taxes, and HOA fees)
could not be higher than
$4,000 X 29% = $1,160.
Remember... mortgage professionals are using these ratios to answer your question,
"How much home do I qualify for?" Only you can determine how much you can afford.
Back End Ratio
To calculate the back end ratio you add together all of your monthly debt. Include you mortgage payment (including insurance, taxes, and HOA fees) plus monthly credit card, car loan, child support, and any other monthly loan payment.The result can not be higher than 41% for an FHA loan.
(This is also sometimes referred to as your debt-to-income-ratio)
If your total monthly expenses are going to be:
- $1,160 for your mortgage
- $300 for your car payment
- $200 in monthly credit card debt
Assuming your monthly income is still $4,000,
then the back end ratio would be:
($1,160 + $200 + 300 = $1,660) / ($4,000) = 41.5%.
then the back end ratio would be:
($1,160 + $200 + 300 = $1,660) / ($4,000) = 41.5%.
That is a slight bit over the maximum ratio allowed.
You would need to pay down your credit card a bit or find a slightly cheaper home to qualify.
These ratios don't take other factors into consideration such as credit scores. But hopefully this helps clarify the difference between "How much home can I AFFORD" and "How much home do I QUALIFY for".