If you're in the market for a new house, do you know how much you can really afford?
The short answer: Most lenders now look at a borrower's total debt – car loan payments, student loans, mortgage payments and other debt – when reviewing mortgage applications. As a borrower, your monthly recurring debts, including your mortgage payment, cannot exceed 45 percent of your gross monthly income.
"If it even gets back at 45.01 percent, it gets declined, so they're very strict on that guideline," says Jeann Digman, vice president of mortgage lending at Dupaco.
But the debt-to-income ratio isn't the only factor homebuyers should consider. Before you pull the trigger on a home purchase, look at the bigger picture:
- Be realistic. While your mortgage's principal and interest won't fluctuate, chances are your property taxes and homeowners insurance will increase over time. "Some people don't take that into account," Digman says. "Can they afford the payment four years from now when their taxes bump up?"
- Get out your crystal ball. While it's hard to predict the future, think about your family's long-term goals and the what-ifs of life. Do you or your spouse plan to return to school down the road? How will that affect your income? What if one of you loses your job? Are the mortgage payments still feasible?
- Do the math. Use one of Dupaco's mortgage calculators to help you determine, for instance, how much you can borrow.
- Don't give up. If your debt-to-income ratio is too high, talk to your financial institution. You might be able to reduce your monthly payments by consolidating credit card payments or restructuring car loans. Even if it takes awhile to reduce those payments, you've got time to make it work: Interest rates are not projected to increase in the very near future, Digman says.