Calculate how much house you can afford based on income, debts, and down payment
Lenders use debt-to-income ratios to determine how much they'll lend you. The front-end ratio compares your housing payment to gross income; the back-end ratio includes all monthly debt obligations. Conventional loans typically require a back-end DTI under 36%, though many lenders approve up to 45% with compensating factors like excellent credit or large down payments.
Pre-qualification is an informal estimate based on self-reported figures; pre-approval involves verified income, assets, and credit. In competitive markets, a pre-approval letter is often required to have an offer considered. Improving your buying power: pay down installment debt before applying, avoid opening new credit accounts, and consider a larger down payment to reduce the required loan amount.
The 28/36 rule says your housing costs should not exceed 28% of your gross monthly income, and total debt payments should not exceed 36%. It's a guideline for conventional loans; FHA and VA loans are more flexible.
Credit score affects your interest rate significantly. A 740+ score may get 6.5%, while a 620 score may see 7.5% or higher on the same loan. A 1% rate difference on a $300,000 loan adds $200+/month to payments.
20% down eliminates PMI (private mortgage insurance, typically 0.5–1.5%/year), but many buyers purchase with less. FHA allows 3.5% down, conventional allows 3–5%. Lower down payments mean higher monthly costs but preserve cash for emergencies.
PITI stands for Principal, Interest, Taxes, and Insurance — the four components of your total monthly housing payment. Lenders use PITI in DTI calculations. HOA fees are sometimes added, making it PITIA.
Pre-qualification is a quick, informal estimate. Pre-approval involves verifying your income, employment, assets, and credit through documentation. Sellers take pre-approvals seriously; pre-qualifications carry little weight in competitive markets.
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