| Any person who has ever had a dream of being a | | | | lenders can bring up the threshold to as much as over |
| homeowner needed to face the question at some | | | | 40% depending on the situation, but you have to take |
| point--How much can you really afford? If you look at | | | | into consideration the fact that if you put over 40% of |
| the prices of real estate properties these days, they're | | | | your income towards paying for the house, you'll have |
| quite daunting at first, but it's essential that you're | | | | very little left for yourself and your other debts. This |
| updated with the trend of prices. For example, if your | | | | stretches you out too thinly and puts a lot of financial |
| goal is to have Rancho Bernardo real estate, it would | | | | stress on you. This also leaves very little room for |
| be helpful to see how much Rancho Bernardo homes | | | | times of emergencies when you need to spend more |
| are worth these days so you have a point of | | | | money than usual. |
| reference to determine whether you're ready to buy | | | | 2. Back-end ratio - The back-end ratio is computed by |
| or not. When you've figured out how much it takes to | | | | taking the total of all of your debts and determining |
| own a property, it's time to sit down and face the | | | | what percentage of your annual gross income it takes |
| music. Time to find out how much you can afford. | | | | up. This takes into account all kinds of debts from child |
| There are several ways that lenders can compute this | | | | support to credit card debts. Most lenders will peg the |
| for you, and it's good if you have a basic idea of how | | | | threshold at 36% of your gross annual income. For |
| they do this. | | | | example, if your annual gross income is $150,000, |
| How DO they do it? | | | | multiply it by.36 and divide it by twelve. You'll come up |
| Basically, lenders have a set of formulas that they use | | | | with $4,500, which means that your total debt should |
| to determine how much you can afford to pay every | | | | not be more than $4,500. If you have this information, |
| month and whether you're going to be able to keep up | | | | you'll more or less know whether your monthly |
| with the mortgage payments for the property. Here | | | | mortgage, taxes, insurance and other debts fit into that |
| are a few factors that they look into: | | | | figure. If not, you can either reduce your debts or |
| 1. Front-end ratio - To compute for the front-end ratio, | | | | increase your productivity. |
| take the total of the PITI (Principal, Interest, Taxes, | | | | 3. The amount of downpayment you paid - You can |
| Insurance) which you'll have to pay monthly and | | | | afford a better house if you paid a higher amount in |
| determine its ratio against your monthly income. If the | | | | downpayment. Or you can lower your monthly |
| total of the PITI you have to pay every month comes | | | | amortization because of your downpayment. The |
| up to more than 28% of your monthly gross income, | | | | amount of downpayment you make has a direct |
| you may not be able to afford the mortgage you | | | | effect on the front-end and back-end ratio so you |
| want, or you need to lower the budget a bit. Some | | | | have to think about this as well. |