Each mortgage program has a maximum percentage of your income that can be allocated to debt payments. For example for loans sold to Fannie Mae the limit is 45%, and for FHA loans it is 41% (as of the time of this writing – guidelines can and do change all the time, so check with your mortgage representative about current debt to income limits.) This means that when you add up your mortgage payment and any other debt payments (student loans, car loans, credit card payments, etc.) it must amount to 45% (in the example of a Fannie Mae loan) of your monthly paycheck or less.
There is also a restriction on the amount of your income that your mortgage payment alone can make up, currently 29% for an FHA loan.
If you have an excellent credit profile you might qualify to borrow an amount that would make your mortgage payment the maximum allowed by the guidelines. This may however be more than you can comfortably afford. When you look at your additional expenses which aren’t debt related such as groceries, utilities, child care, entertainment, travel, cell phone, medical and insurance costs, plus what you like to save and contribute to charity it might amount to more than 55% of your monthly income. If you were to take out a mortgage that pushed your debt payments to the 45% max there just wouldn’t be enough money to go around each month. This is why it makes sense to take a look at your budget, not just your mortgage pre-approval when deciding how large a mortgage you can truly afford.
Please note: The content on AFRMortgage.com is for informational purposes only. It is not a substitute for the advice of a mortgage professional, real estate agent, attorney, tax advisor, or other professional.
