Going past this threshold is a risky move. This ratio is exactly the maximum experts say you can afford. However, adding in $1,680 in monthly mortgage payments would push up your debt load to $2,180 and your debt-to-income ratio to 36%. Think about this ratio in terms of your monthly expenses: If you have a monthly income of $6,000 but also spend $500 each month paying off credit cards or other debt, you would divide $500 by $6,000 to get a debt-to-income ratio of 8.3%. This ratio should be “no more than 36%,” says Freeman ideally, this ratio should be much lower. This ratio compares your debt, or how much money you owe (to credit cards, colleges, car loans, and-hopefully soon-a home loan) to your income. The “36″ refers to your debt-to-income ratio. For example, if your gross (meaning before taxes are taken out) monthly income is $6,000, you would multiply that by 28% (or 0.28), which equals $1,680-this is the maximum amount of your monthly housing payment. The “28″ refers to your monthly housing payment-things such as mortgage, home insurance, and property taxes-which shouldn’t be more than 28% of your gross monthly income (ideally this payment should be less). This payment is easy to calculate, because all you need to do is multiply. One way to factor your income and credit debt into how much mortgage you can afford is to follow the 28/36 rule, a simple but effective ratio for mortgage affordability. Even if your income is substantial, high credit debt means you have less money available to put toward a monthly mortgage. The other half is your debt-meaning the debt you owe to credit cards, college loans, and other creditors. Your income is only half the picture of what determines the monthly mortgage payment you can afford. Why your mortgage payment depends on your income and debt So let’s dive into more specifics on what makes your payment pass muster. “Tripling your income is only an estimate and does not account for your monthly bills,” says Freeman. That said, income isn’t everything, and this is just a ballpark figure to get you started. So if you’re earning $100,000 per year (and you have a reasonable amount of job security and don’t expect wild fluctuations in your income anytime soon), you can afford a house up to three times that, or $300,000.
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