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Before you start looking for a new home, you need to have an idea of how much you can afford to pay for a home. To find this out, you will need to take a closer look at your total monthly household income as well as the debts and regular monthly payments you are already making. In addition, you will need to consider how much money you can put in down payment, the loan interest rate, and the length of the loan. You will also need to have an idea of how much the taxes will be, as well as the insurance and PMI costs. Estimated front and back ratios helps you to limit your housing and necessary living spending. Front ratio is a percentage of your gross income that you can spend on all housing related expenses, including property taxes and insurance. Back ratio is a percentage of your gross income that you can spend on your housing expenses plus cost of shelter: food, clothes, gas, etc. Front / back ratios with values of 28-33 / 36-42 considered conservative these days, values bigger than 35 / 45 called aggressive and not recommended for use. Using all of this information, you can determine how much you might afford to pay for your mortgage. If you are interested in making a $25,700.00 down payment and hope to get a 30 year loan with a 7.000% interest rate, you can afford to purchase a home that costs $257,200.00 if your gross household monthly income is $8,000.00 and your total monthly payments on your other bills is no more than $910.00. If you purchase a home under these conditions, you can expect to pay $2,012.30 per month toward your mortgage. $1,540.80 of this will be toward the actual loan, while $250.00 will be toward taxes and $125.00 will be toward insurance.
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