Computing Your Mortgage

One of the major reasons why the recent recession occurred was because of the surmounting credit of people. There was a false demand in the market, as people acquired things beyond their ability to pay. When it was time to pay, there was no real money to back up the demand, resulting to economic failure and bankruptcy.

Real estate was no exception. There were many short sales and foreclosures when many people could no longer afford to pay their mortgage (aside from the fact that many were laid off from their jobs). To avoid this, it is always good How much can you comfortably spend for a house of your own?
A simple rule to follow is to multiply your annual salary two and a half times. An annual salary of $72,000 can afford a $180,000 home. Beyond than that it would cause some inconvenience. Married couples would be better of by pooling their incomes together, so they can afford a better home.

As for the monthly pay, lenders have this 33/38 guideline. Your housing costs should not exceed 33 percent of your total monthly income (before taxes). When added to all your other consumer debts, should not exceed 38 percent. This 33-38 figure is called debt-to-income ratio.

Housing costs include mortgage payment, taxes, insurance, if any, and homeowners association fees, if any. Hence, for an income of $6,000 a month, housing cost should not exceed $1,980 given the 33 percent front ratio. Make sure your mortgage is below that too, as you have other payments to consider in housing costs.

As for consumer debt, this includes credit card balance, student loan, and other related debts. If you ever have car payment, that would take up much of your consumer debt. Going back to the $6,000 monthly gross salary, your consumer debt plus housing costs should be around $2,280, given the 38 percent back ratio.
The 33/38 debt-to-income ratio is only a guideline for lenders, not necessarily a rule. They can loosen up the figures if you give more down payment, or if you have good credit background. It also depends on what kind of loan program you choose. The 38 back ratio can even extend up to 41. On the other hand, if you only give a small down payment or have a less-than-likely credit report, lenders may be a little tight for you.

For your own safety, stay within this guideline. Take note that you’re not only paying debts with your monthly salary, you need to feed too. You also have leisure, recreation and other basic needs. If you have children, then you have more mouths to feed. Save yourself from sleepless nights by staying within your budget.

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