First Time Home Buyer - Step 2

So you have finished writing down the answers to the top 10 questions....now it's time to do something with them!


First let's decide how much you can afford for a home. For this I am going to teach you a very simple math equation to figuring out what your debt to income ratio is. This ratio is used by ALL lenders to determin how much they will lend you. Most lenders do not want your debt to income ratio to be higher then 43%. That means that with all your monthly bills (the ones on your credit report) can not equil more then 43% of your monthly debt.

To calculate your debt to income ratio follow the bellow equation:

Total Amont of Monthly Debt Total Amount of Gross Monthly Income
(credit report only) / (the amount you get before taxes)

Now to see the amount in the form of a percentage multiply your answer by 100.

What is your debit to income? Right now it should be pretty low (you shouldn't have a mortgage payment in the calculations yet)

So how much of a mortgage payment can you afford? To find this out follow the equation bellow:

Total Amount of Gross Monthly Income
(the amount you get before taxes) X 43% = Total Monthly Debt Allowed

Total Amount of Monthly Debt
Total Monthly Debt Allowed - (credit report only)

The amount that is left over after your monthly debts are subtracted from your monthly debt allowance is the amount of mortgage payment you can afford. If you would like to see an example you can view it bellow:

Total Monthly Debt = $600
Total Monthly Income = $3000
Current Debit to Income Ratio = 600 / 3000 = .20 (multiply by 100) = 20%
Total Monthly Debt Allowance = 3000 * 43% (or .43) = $1290.00
Total Mortgage Payment = 1290.00 - 600 = $690

Congradulations on your completion of Step 2!

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