Don’t fall into a mortgage you can’t afford

Consider calculating your housing ratio before applying for a home mortgage loan.

According to Pew Charitable Trusts, approximately 44 percent of Americans have mortgage debt. Owning a home is a goal for a lot of people. But when looking for a home, how much is too much when applying for a home mortgage loan? Your mortgage payment should not be higher than 28 percent of your income before taxes, according to the Consumer Financial Protection Bureau (CFPB).

Lenders qualify buyers on gross income, the amount earned before taxes and deductions, and use housing ratios as one of many qualifying factors. According to Investopedia, a housing ratio is a ratio comparing housing expenses to before-tax income that is used by lenders to qualify borrowers for a mortgage. The housing expense or ratio measure includes mortgage principal, interest payments, property taxes, hazard insurance, mortgage insurance and association fees.

Calculate your housing ratio by dividing your monthly mortgage payment, including principal, interest, taxes, insurance and association fees, by your gross monthly income.

Example: Total mortgage payment: $560 /gross income: $2,250 = 25% housing ratio

Lenders will probably consider this a good ratio because it is less than 28 percent of the gross income. However, it is important to calculate your expenses using net (after taxes and deductions) income as well so you have an accurate account of your expenses based on your net or take-home pay.

MSU Extension is a HUD certified housing counseling agency and all staff are MSHDA certified housing counselors. Attend in-person workshops or webinars, like our free How Much Home Can You Afford Webinar to develop your skills in homeownership.

Be sure to check out Michigan State University Extension and MIMoneyHealth.org for more great tips on saving. Don’t forget to take our Financial Health Survey and get your score to learn about more ways to improve your financial health.

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