How much house payment is too much? How much is just right? Housing Expense is defined as “PTIT(A)” ((Principle+Interest+Taxes+Insurance ((+Association )meaning HOA fees when applicable)) or 31%. 31% is the amount of your gross income industry experts believe to be “affordable”. This means if your income is $50,000 per year, (divided by 12) you earn $4,166 per month, and (times 31%) a $1,292 “housing expense” would be your limit suggested by financial advisors. Approximately 1/3 of your “gross monthly income”.
The percentage of your income taken up by your housing expense is considered Front End, “Debt To Income” (DTI) ratio. Housing expenses plus all other credit obligations are considered “Back End” DTI all other expenses such as utilities, cable, food etc, is “discretionary” and not considered in the calculation. Each mortgage loan available to consumers has its own Front End and Back End DTI ratio limits, or some lenders consider Back End ratio only. Back end ratios higher than roughly 41% begin to get into dangerous ground.
Most of us think, “we can afford $XXX amount for housing” which may or may not be in line with what financial experts would suggest (the 31% example above). The issue is, while most reputable lenders stick with the 31% housing debt standard or 40% total debt standard, not all do. Smaller lenders or those found online might completely disregard affordable ratios and if they do, and the borrower is not educated, trouble and foreclosure could be the result. I met a loan officer once who, when I asked her what their DTI limits were, responded: “I have gotten a 55% DTI approved”. I did not say out loud “You are setting people up for failure” but maybe I should have…
When you commit to a house payment and “life happens” you may have unexpected repairs, or an unplanned car payment, medical bills or anything else that comes along. The 31% ratio is designed to help people manage the surprises (that and emergency savings!). If you encounter a lender that will push your limits to 45% or worse 55% DTI ratio and “life happens” – soon you’re finding yourself in an uphill battle.
Some of us can manage much higher ratios and some of us can NOT manage much lower ratios. What you can manage is driven by your personal practices.
You are, your own most important advocate. Know what you can afford instead of a lender telling you what they will give you. If you need help calculating your gross income, please feel free to email, call or message me!