Your lender decides what you can borrow but you decide what you can afford. They make qualification decisions based on averages and formulas. However, they do not know your lifestyle and spending patterns quite as well as you do. So, leave a little room for the unexpected – for all the new opportunities your home will give you to spend money, from furnishings, to landscaping, to repairs.
Historically, banks use a ratio called 28/36 to determine how much borrowers could borrow. A standard rule for lenders is that your monthly housing payment (principal, interest, taxes and insurance) should not take up more than 28 percent of your income before taxes. This debt-to-income ratio is called the “housing ratio” or also referred to as the “front-end ratio.” Lenders also calculate the “back-end ratio.” It includes all debt commitments, including car loan, student loan and minimum credit card payments, together with your house payment. Lenders have historically preferred a back-end ratio of 36 percent or less. For example: A couple together earns $10,000 a month. Their total debt payments are $3,800 a month. Their debt-to-income ratio (aka back-end ratio) is 38 percent.
$3,800 / $10,000 = 0.38
As home prices have risen, some lenders have responded by stretching these back-end ratios even higher than 38 percent. No matter how expensive your market though, you should be careful before stretching your budget quite so much. Deciding how much you can afford should involve some careful attention to how your financial profile will change in the upcoming years.
Thinking of buying or selling real estate? You should consider using a realtor. If you are interested in buying real estate (new home, existing home, or commercial property), please contact me (Alan Lane with Keller Williams Realty at 2119 W Brandon Blvd, Brandon, Florida 33511). As a life long resident of Central Florida, I can help you find the right property for you whether it is in Lakeland or as far south as Sarasota. The Keller Williams offices of ”Suburban Tampa” include the offices in Brandon, Plant City, Fishhawk Ranch, and our newest office in Valrico. My email address is email@example.com, or call me at 813.205.9280. If you are just starting your search, you can search the MLS for real estate opportunities on my website at this link.