When determining how much house you can afford to buy, you will need to know your gross monthly income. The general rule of thumb is that the total house payment (PITI) including tax and insurance escrows should not be more than 29% of your gross monthly income. This guideline also depends on the amount of your other monthly debts (credit cards, car loans, student loans, etc.) because the lender will also look at all of these debts to find out your Total Debt Ratio. Your Total Debt Ratio including your house payment should not be more than 41%.

Before calculating your debt to income ratio, you should carefully consider your spending habits and analyze your current housing expense to determine what you are comfortable in paying. Often, the ratios will tell you that you can afford more of a payment than you may be comfortable in paying.

The mortgage loan interest rate can make a big difference in the amount of funds you can afford to borrow. WCDA’s job is to make sure that we get the lowest interest rate possible in the current interest rate environment. We work to get a lower interest rate for you so that you can afford a little more home.  

The following chart gives you an example of how to calculate a mortgage loan payment by using a factor. Select the interest rate and term that applies to your mortgage loan and multiply the factor by the number of thousands of dollars you are borrowing. ($70,000 = 70) This result will be your monthly P&I (principal and interest) payment. Remember, you will also be required to pay 1/12 of your taxes, homeowners insurance and mortgage insurance in with your monthly payment (T & I Escrow) so that the mortgage servicer can be sure that your taxes and insurance are paid annually. Generally, your taxes and insurance add an additional 5% on to your PITI Ratio.

For example: If you are borrowing $70,000 for 30 years at an interest rate of 7%, your P & I factor would be 6.6530. Multiply the factor by 70. (6.6530 x 70 = $465.71). This gives you your P & I payment. Generally, Taxes and Insurance will run you from $100 to $125 per month so, your total house payment (PITI) would be just under $600.

Compare this amount to what you currently pay in rent and remember that the ratio is based on a before tax calculation and not based on your take home pay. Subtract this PITI payment out of your monthly take home pay to see what residual income you have left to pay for all of your other debts and to keep up with your normal spending habits. 

Once you buy a home, there are always decorating and maintenance items that you will want to do to that home. Keep these expenditures in mind while you determine how much home you can afford.