Ready to buy a property? One of the main questions that you’ll likely have on your mind is how big of a mortgage you can afford to take out. Mortgage brokers will work with you to determine this figure, looking at your gross monthly income, credit history and how much cash you’ll be able to offer for a down payment.
The debt-to-income ratio comes into play here, which refers to the housing expense (or front end) ratio and the total debt-to-income (or back end) ratio.
The housing expense ratio reveals how much of your gross monthly income would be put towards the mortgage. As a rough guide, this figure should not exceed 28% of your gross monthly income. To calculate this figure, multiply your yearly salary by 0.28, then divide by 12 – the answer is your maximum housing expense ratio.
The total debt-to-income ratio shows how much of your gross income would go towards your total debt obligations, including the mortgage, credit card bills, student loans, car loans and more. As a rough guide, your monthly debt obligation should not exceed 36% of your gross income. To get your maximum allowable debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12.
For example, if you make $80,000 a year, your maximum amount for monthly mortgage-related payments at 28% of gross income is $1866. ($80,000 times 0.28 equals $22,400, and $22,400 divided by 12 months equals $1866.66).
Of course, your total monthly debt payments should not exceed 36%, which comes to $2,400. ($40,000 times 0.36 equals $28,800, and $28,800 divided by 12 months equals $2,400). Make these calculations even easier with our online mortgage calculators.