More mortgage Q&A, this time I address the question, “What mortgage can I afford on my salary?”
These days, in many cases you actually have to document your salary/income, as the stated income loan days have somewhat come and gone.
That said, it’s important to see what size mortgage you can qualify for based on your actual salary.
The way you accomplish this is by figuring out your debt-to-income ratio, which is essentially your monthly liabilities divided by your gross monthly income (based on the most recent two years).
It’s further broken down into a front-end and back-end ratio, with the former being your monthly housing payment divided by gross income and the latter being all expenses.
A bank or lender may have a DTI requirement of something like 30/45, meaning your housing payment can’t exceed 30 percent of monthly gross income.
This will give you an idea as to what you can afford; from there, you’ll need to get a pre-qual to see what type of mortgage rate you’ll be offered in the current environment, and also what you’ll be required to put down (zero down financing is basically a thing of the past as well).
You may be able to get your hands on a larger mortgage if you find an interest-only option, assuming you’re qualified using the I/O payment, but don’t cut it too close.
With mortgage rates yo-yoing, you won’t want to find yourself out of luck if rates swing higher and push your DTI ratio beyond the acceptable limit.
Also be sure that you’re comfortable with the size of your monthly housing payment, and don’t forget about taxes and insurance, which can add up as well.
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