A simple calculation lets you know in which price range you should be looking. Your debt-to-income ratio will determine the highest loan you should apply for in purchasing your next home. Take into account two ratios, front end and back end, alongside your monthly gross salary (before taxes) to calculate your loan amount.
The first, or front-end ratio, has to do with your housing costs. Add up your “P.I.T.I.” (Principal, interest, taxes, insurance, and association fees) to determine your housing costs. Figure out what percentage of your gross monthly income is applied to your PITI.
The back-end ratio is the percentage of your gross monthly income used to pay any consumer debt as well as your PITI. Car loans, credit cards, student loans and any other monthly revolving and installment loans are included in this category.
Generally Income-to-debt ratios fall in the 28/36 to 35/41 range. If a debt-to-income’s ratio requirements are 30/39, a person whose income is $6,000 can apply $1800 towards the front-end ratio and $2340 toward the back-end ratio.
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