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Dreams of Home Ownership

Many people dream of owning their own home. Let’s take a look at some of the financial calculations used to underwrite and approve a home mortgage loan.

Here’s a mortgage calculator you can use for simple estimates.

The first calculation to highlight is the front-end ratio, which is the percentage of your gross monthly income allowable for principal, interest, taxes and insurance payments (PITI). The general guideline for this ratio is to be 28% or less of gross income.

The second calculation is the back-end ratio, which is the percentage of your gross monthly income allowable for reoccurring debt payments, principal, interest, taxes and insurance payments (RDPITI). The guideline for this ratio is to be 36% or less of gross income.

Let’s take a look at the following example to see how these ratios work.

We’ll assume a gross annual household income of $50,000 (annual income $50,000/12 mo. = $4,166.67), with a monthly car payment of $300, a student loan payment of $50, and a monthly credit card payment of $20. The client comes to the bank with a home mortgage request of $100,000. We will assume an annual interest rate of 8.00%, a 30-year amortization, and annual real estate taxes of $3,000, and an annual homeowners insurance premium of $250.

NOTE: This example is for educational purposes only. See your lender to discuss your individual situation.