Can I Afford a Mortgage?

When you go to the bank to find out if you can afford a mortgage, the loan officer is going to look at three things. He's going to look at how much money you earn, whether or not you've been a good credit risk and whether you have something valuable that can be traded, in case you don't pay the bank back.


Front-end Mortgage Ratio

The front-end ratio measures how much of your gross income will go to the mortgage payment. At most, you'll be allowed to use 30 percent of your gross income for the mortgage. So, if you earn $5,000 a month, you'll be able to pay $1,500 a month.

Back-end Mortgage Ratio

The back-end ratio shows how much of your income goes to paying debt on a monthly basis. Assume you have $5,000 in gross monthly income and $500 in monthly debt payments. Take $5,000 and divide it by $500 and you'll see that your debt payments are 10 percent of your gross income. Now, if you take your front-end percentage and your back-end percentage, you'll get 40 percent of your monthly gross income will go toward paying off your debts, including your monthly mortgage payment.

Repayment Variables

Acceptable front-end and back-end debt ratios vary by lender. If your numbers don't work with one lender you can try going to other lenders who might be more flexible. It's important to understand that you have to use accurate numbers when you buy a house. Otherwise, you might think you can afford more of a house than you actually can. In fact, you may want to shoot for paying 28 percent of your gross income on your mortgage, to ensure a financial cushion.

Mortgage Affordability

To find out whether you can afford a mortgage, look at properties under the maximum amount that a lender will let you borrow. If you get a less expensive house, your monthly mortgage payments will be lower. By looking around for some bargains, you can get into a house without forcing yourself to suffer a financial crisis.

Credit-worthy Borrower

If you have some bumps in your credit history, a lender might insist that you pay a higher rate on your loan than someone with good or excellent credit. This can also cause your monthly mortgage payments to be higher than that of someone who has better credit. It's important to review your credit history and make any corrections to your record at least six months before applying for your loan.

The Down Payment

The more money you are able to put down on the house, the less you have to borrow. This can help offset a higher monthly payment. If you are able to put down at least 20 percent of your sales price, you will not have to pay private mortgage insurance. This, too, will reduce your monthly mortgage payments.