Posted by: RM Beltran | November 6, 2011

Step #2 The dreaded #, how much can I afford?

Before you start touring homes for sale, it’s important to start off with a budget so you know how much you can afford to spend. Knowing what mortgage payment you can handle will also help you narrow the field so you don’t waste precious time touring homes that are out of your reach. The key factor in figuring how much home you can afford is your debt-to-income ratio. This is the figure lenders use to determine how much mortgage debt you can handle, and thus the maximum loan amount you will be offered. The ratio is based on how much personal debt you are carrying in relation to how much you earn, and it’s expressed as a percentage.

The ideal ratio most mortgage lenders generally use are a ratio of 36 percent as the guideline for how high your debt-to-income ratio should be. A ratio above 36 percent is seen as risky, and the lender will likely either deny the loan or charge a higher interest rate. Another good guideline is that no more than 28 percent of your gross monthly income goes to housing expenses.  Of course there are exceptions to the rules for example, a higher loan term, government program or, a sub-prime mortgage in which these programs ratios can go as high as 45 percent.

You don’t want to end up finding the right home and not being able to capitalize on it. Talk to your real estate agent in advance: tell them where you stand and have them look for the appropriate properties for you. If you don’t have one, or have questions, you can post your profile at and get your questions answered: before you spend too much time out there perhaps looking at the wrong places.


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