Can You Afford a Home? Housing Ratio and Debt Ratio

The median price of a home as you read this article was running over $200,000. Don’t forget to throw in maintenance, insurance, and property taxes. To see if you can afford a home, with a mortgage, why not do the calculations that lenders do—before you get in over your head?

Lenders often look at two ratios:

Housing ratio

. This is your monthly housing expenses as a percentage of your gross monthly income. Simply add up all the money you’d be spending monthly on a home. This includes

- Mortgage payment
- Monthly taxes
- Monthly hazard insurance
- Monthly condo or homeowner fees

Divide the sum by your gross monthly income (your income before taxes are taken out). Lenders typically like the result to be about 28% or less.

Debt ratio

, or total obligation ratio, is the percentage of your monthly gross income that you can spend on both housing and long-term debt (debt you’ll be paying at least 10 months). For this, add

- Your monthly housing payment
- Car loans payment
- Student loans
- Credit cards
- Other loans or bills

Divide the sum by your gross monthly income. Lenders like this result to be within about 36% of your gross monthly income.

If you’re a little off on those ratios, don’t despair. They’re definitely not engraved in stone. You still might qualify for a local, state, or federal mortgage program that is more lenient. In addition, lenders also consider your credit reports. The most important thing they want to know is that you have a history of paying on time. This will ensure that you can afford a home.

If you decide to add buying a home to your list of goals, be sure to include the down payment and any mortgage closing costs.