The quickest and easiest way to estimate how much you can afford to pay for a home, without contacting a mortgage lender, is to use the FHA debt-to-income (DTI) ratio guidelines. Your DTI shows your monthly recurring debt relative to your monthly income. The FHA debt-to-income ratios as of this writing is 31/43. This means that your front end ratio should not exceed 31% of your monthly gross income and that your back end ratio should not exceed 43% of your gross monthly income.
The front-end ratio is your housing ratio. It will tell you what percent of your monthly income you can use towards your monthly mortgage payments. Your monthly mortgage payment includes the principal, interest, taxes and insurance.
The back-end ratio is your total debt ratio. It will tell you what percent of your monthly income goes towards paying all debt. This includes mortgage payments, credit card payments, loan payments (car, student loans), child support, etc.
To easily determine how much you can afford to pay for a home using the FHA Debt-to-Income Ratio Guidelines:
Front End – GROSS monthly salary X 31% = Maximum house payment (Principal, Interest, Taxes, Insurance, Homeowner’s Dues) Example: $4000 x 31% = $1240.00
Back End – GROSS monthly salary X 43% = Maximum house payment (Principal, Interest, Taxes, Insurance) PLUS all other recurring debt Example: $4000 x 43% = $1720.00
Estimate your ratios prior to allowing a mortgage lender to pull your credit to minimize credit inquiries. In some cases, lenders will approve a buyer for an FHA loan if their DTI exceeds the FHA guidelines.