Mortgage Help   Mortgage Rates Real Estate Credit Foreclosure Tax Mortgage Rates How much house can you afford? Mortgage Basics Chapter 1: How much house can you afford? Homeownership Should You Buy or Rent Summary   Chapter 2: Adjustable-rate mortgages ARM and a fixed-rate mortgage Fixed-rate mortgages Understanding the key elements Which type of lender is right for you? Other types of mortgages Subprime Summary   Chapter 3: Your credit score Down Payment How lenders set rates Low down payments Mortgage insurance Your mortgage payment Mortgage Points Summary   Chapter 4: The good faith estimate Inspection and Insurance Necessary paperwork for a buyer Other lender paperwork Paperwork and fees Prequalification and preapproval Special circumstances Summary   Chapter 5: Ten questions to ask Turned down for a mortgage Underwriting What lenders ask Summary   Chapter 6:  Understanding the closing process Escrow Summary   Chapter 7: When your mortgage is sold Avoiding foreclosure Paying ahead Payment changes Refinancing Removing mortgage insurance Summary Mortgage lenders are concerned with one thing - your ability to pay back a mortgage. In order to qualify for a mortgage, a lender will need to look at your credit history, you r monthly gross income and how much cash you have for a down payment and closing costs. Do you know how much house you can afford? The amount of money you can afford to spend on a home depends on your debt-to-income ratio. This ratio is two parts: the front-end and the back-end. The front-end ratio The front-end ratio is what percentage of your before-tax monthly income would go towards your monthly mortgage payment. Most lenders follow the same guidelines. They require your entire monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, to remain below 28% of your gross monthly income. To find out how much your monthly housing expense can be, multiply your annual salary by 0.28 and then divide by 12. The answer is how much you can spend on housing. The back-end ratio The back-end ratio is your total debt-to-income ratio. This is how much of your gross income is devoted to all of your debts, including mortgage, auto loans, child support, alimony, credit cards and other loans. Your total monthly debt obligation should remain below 36% of your gross income. Simply multiply your annual salary by 0.36 and divide by 12 to find your debt-to-income ratio. The amount will be the maximum debt you can handle, according to your lender. How it works For example, say you have a gross income of $40,000 a year. The maximum amount for your monthly housing expenses is $933. According to your income, you should not exceed monthly debt payments of $1,200. Most lenders will require that your housing cost be under 26%-28% of your monthly gross income. They will be looking to see that your debt-to-income ratio be below 33% to 36%. FHA loans are more lenient, allowing 29% for your front-end ratio and 41% for your back-end. Remember, that your front-end ratio isn't just your mortgage payment. Lenders will include the cost of taxes and insurance to your housing expenses. When looking at purchasing a property, it is important to get an estimate of both real estate taxes and homeowners insurance premiums. To secure a mortgage, you must have homeowners insurance. When shopping around, make sure that you ask about any special requirements a home might have, such as flood insurance or coastal area wind coverage. If you put less than 20% down on the purchase of your new home, you will have to obtain private mortgage insurance (PMI), which will be added to your monthly costs. Association or condominium fees may also be added to your front-end ratio. Make sure that you consider the total cost of a home when considering making an offer.