If you’re like most people, a house is the biggest purchase you will make in your lifetime. Spending too much on a home could interfere with other financial goals, such as retirement and saving for college or university. It is best to determine what you want to pay—and what you can pay—on a mortgage before you start looking.
To qualify for a home loan, lenders will look at your front-end ratio and your back-end ratio. The front-end ratio determines how much you will be spending on principal, interest, taxes and insurance in comparison to your household’s gross monthly income. Generally, a lender will want your front-end ratio to be below 28 percent of the gross monthly income.
The back-end ratio considers not only the principal, interest, taxes and insurance but the total debt you owe, such as student loans, credit card debt and automobile loans. Ideally, this ratio should not surpass 36 percent of the gross monthly income of your household.
Apart from the above-mentioned debt to income ratios your loan must meet, the amount of your monthly mortgage payment should also reflect what you personally are comfortable paying. If an unexpected expense arises, will you still be able to make your mortgage payment? What are your plans for the future? If you are currently a dual-income family, is there a possibility that children may eventually change that? We usually recommend that you have six months’ worth of reserves for bills and mortgage payments in case of unforeseen circumstances. (However, reserves are not required to obtain a mortgage.)
To be sure you are shopping in the appropriate price range, contact one of our loan officers first. By getting pre-approved or, better yet, by using the Compass Mortgage Get Committed® program, you can be confident that your home selection coincides with your financial abilities and goals.
Looking for more information on buying a home? Our Mortgage 101 handbook is the ultimate guide for First Time Home Buyers.