So how can you get an idea of how much home that you can afford? It's a two step process. The first step is determining what your ratios are. But, just what are these ratios, you might ask.
The first is called the Front End Ratio. That is merely how much your cost of housing will be compared to your gross income. Note: it is not how much your loan payment will be but the total cost of housing which includes Principle, Interest (both of which are our loan paymet), Taxes and Insurance. These are commonly referred to as PITI. Gross Income is your total monthly income from all sources: wages, alimony, interest, dividends, social security, etc. Your monthly income is figured by looking at your previous 12 months income and dividing by 12.
Front-End Ratio = (Monthly Housing Expense / Gross Monthly Income) x 100
The second is call the Back End Ratio, or your Debt-to-Income Ratio. This is the total of all your monthly debt payments, including PITI, compared to your gross monthly income. This includes all debts: credit cards, student loans, alimony, child support, gym memberships, etc.
Back-End Ratio = (Total Monthly Debt Expense / Gross Monthly Income) x 100
Lenders use these ratios to calculate risk, or the likelihood of the borrower being able to make their payment on time. The higher the ratio, the greater the risk.As mentioned earlier, various loan types can and do have different ratio requirements. Below is a list of current ratios. Note: These figures have changed recently and are subject to change at any time under current credit conditions.
FHA & VA - 31 Front End /43 Back End Ratio
USDA Rural Development - 29 Front End / 41 Back End
Conventional - 33 Front End / 45 Back End
Using these figures, if you have a monthly income of $3000.00, under FHA and VA, your total monthly housing expense can be as high as $930.00 and your total debt to income can be as high as $1290.00 a month. For Rural Development, this would be a bit lower, for Conventional, a bit higher. Depending upon where you are looking, your PITI will vary based upon tax rate and insurance. In the Athens Area, for a median home sale of $170,000 taxes could run $160. month and insurance $40 month for a total of $200.00. This means you can afford a home with a loan amount of $730/month. (Note: Taxes and insurance will vary. Those figures are only approximate and will be dependant upon assessment and any exemptions you may be eligible for.)
Lenders usually place more emphasis on back end rations than front end.
The second step is to determine how much home your loan payment will cover. Use the chart below to determine your monthly principal and interest payments at various interest rates for either a 15- or 30-year term.
Interest Rate Factors Per $1000
| Interest Rate | 15 Yr. Term | 30 Yr. Term | Interest Rate | 15 Yr. Term | 30 Yr. Term |
|---|---|---|---|---|---|
| 4% | $7.40 | $4.77 | 8% | $9.56 | $7.34 |
| 4.25% | $7.52 | $4.92 | 8.25% | $9.70 | $7.51 |
| 4.5% | $7.65 | $5.07 | 8.5% | $9.85 | $7.69 |
| 4.75% | $7.78 | $5.22 | 8.75% | $9.99 | $7.87 |
| 5% | $7.91 | $5.37 | 9% | $10.14 | $8.05 |
| 5.25% | $8.04 | $5.52 | 9.25% | $10.29 | $8.23 |
| 5.5% | $8.17 | $5.68 | 9.5% | $10.44 | $8.41 |
| 5.75% | $8.30 | $5.84 | 9.75% | $10.59 | $8.59 |
| 6% | $8.44 | $6.00 | 10% | $10.75 | $8.77 |
| 6.25% | $8.57 | $6.16 | 10.25% | $10.90 | $8.96 |
| 6.5% | $8.71 | $6.32 | 10.55% | $11.05 | $9.15 |
| 6.75% | $8.85 | $6.48 | 10.75% | $11.21 | $9.33 |
| 7% | $8.99 | $6.65 | 11.25% | $111.36 | $9.52 |
| 7.25% | $9.13 | $6.82 | 11.5% | $11.52 | $9.71 |
| 7.5% | $9.27 | $6.99 | 11.75% | $11.68 | $9.90 |
| 7.75% | $9.41 | $7.16 | 12% | $11.84 | $10.09 |
4. Compare that to the payment you reached by applying the ratios.
For instance, if you assume a 30 year loan at 5.5% for a $170,000 home, multiply $5.68 x 170 (the number of thousands in 170,000). Your payment would be $965.60, much higher than you can qualify for. To find out the approximate loan amount, divide $730 by $5.68. Your result will be a $128,500 loan at 5.5%. If you want to buy a home higher than that amount you will need to either make a larger down payment or qualify for a lower interest rate.
Note: This is not to be construed as financial advice. It is merely to provide you a means of approximating the price of a home you may be able to afford. Please check with an experienced lender to determine the exact amount of loan and interest rate you qualify for. They will then be able to give you a more exact price of a home you may be able to get a loan for.
For information on buying or selling real estate in Athens and the surrounding counties, call me at 706-207-5290 or click here to email me. If you would like to search for properties available in this same area, please click to follow the link to The Athens Real Estate Page.
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