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You’ve already made significant progress toward house ownership by enrolling in a mortgage program. Knowing your maximum budget for a house purchase is essential before you begin your search. You’ll need to make a few notes before you start. Get out some paper and a pen and get set to work!

The first step is highly fundamental. You’ll need to know how much money you bring in monthly or the money you and any co-borrowers bring in if you get a joint credit. You’ll need your most recent pay stub, or at least the one before that, and a working knowledge of a few keywords to figure out how much money you bring in monthly. First, we have GMI or Gross Monthly Income. The more significant number on your paychecks represents your gross monthly income (GMI), which is your income before taxes and other deductions. Second, you must calculate your YTD (year-to-date) revenue. This is the sum of your Gross Income, which will be listed on your pay stub. In addition to your pay stubs and yearly revenue, we need to know your pay period.

Your most recent pay receipt should be located immediately. Got it? Great! Do the arithmetic with me. Find out if your pay stub specifies an hourly rate, and if it does, write that number at the top of your page. Next, verify the last pay period date on your paycheck stub. Got it? If you were paid by the hour, note it down there. You will either have a hole or a half number based on the date your pay period ends. Let’s tally up the number of months you’ve been paid this year. Here’s a case in point.

My most recent paycheck was deposited into my bank account on July 31st, and my pay stub indicates that I was paid from July 15th through July 31st. (January, February, March, April, May, June, & July). If your termination date is on or around July 15th, you won’t receive seven full months of pay; you’ll receive 6.5 months’ worth instead. What does this imply, then? So, here’s what you do: take your annual income (note your yearly income under the date of your last paycheck) and split it by the number of months you’ve been paid; in my case, that was seven months. Put your response in the box below your yearly income. Your calculated number is the same amount a bank would use to determine your monthly payment. But that’s not the end of it! Financial institutions often evaluate considerable sums to arrive at a single figure.

We already documented your pay rate, so all you have to do is use it to figure out how much money you’ll be making. This can be calculated by multiplying your hourly wage by the hours you put in per week. Consider the following scenario: you labor an average of 40 hours per week and are paid \$17.25 per hour, for a total of \$690. This figure calculates how much \$35,880 would be earned over a year by multiplying \$690 by 52 (the typical number of weeks in a year). You can calculate your regular monthly payment by dividing \$2,990 by 12. After doing the math, which result do you find to be more significant? Are you basing your figures on your hourly wage or your pay stub’s year-to-date total? Further investigation is required if the difference between these two figures is substantial.

If the two figures above don’t match up, the bank will likely use the average GMI from your last two years of tax reports. You’ll need your tax returns from the past two years and some basic math skills to figure this out: add your two different gross yearly income amounts and divide the result by 24 to get your average monthly income over those two years. Once this is done, banks will typically use it as your income qualification unless it exceeds the thresholds above.

WOW! I trust that doesn’t mess with your mind too much! We now have a better idea of how much house you can afford based on your monthly income, so I’d like you to use the lowest of the three monthly sums I listed above. The amount you put toward your obligations every month is a necessary piece of information for this step. This one can be worked out with relative ease.

To do this, you need only keep in mind that the minimum payment amounts and only the debts mentioned on your credit report are considered when a bank calculates your qualifying ratios (called Debt-to-Income, or DTI). So, what exactly do qualification ratios and DTI imply? Most financial institutions prefer that borrowers have monthly debt payments that amount to no more than 43% of their gross monthly revenue. (but can sometimes be higher). Nothing has changed, have they? Don’t worry; everything will start to make sense soon. Let’s do a bit more arithmetic first.

Please gather up the most recent bills for your revolving credit accounts, including credit cards, mortgages (if applicable), loans (including student loans), lines of credit, and automobile loans. For your ratios, it is unnecessary to record the actual amount you pay each month (since many of us spend more than the minimum). Compute the sum of these figures. Let’s pretend that the following are the minimum payments I currently owe:

Three \$25 installments equal \$75 charged to credit card.

Money Lending equals \$110 for 1 Personal Loan

Two Cars, One Loan equals \$ 350

The overall deficit is \$535.

Once you know how much you owe each month, we can determine how much debt you can carry (including a mortgage obligation) and still get a mortgage. To do this, multiply your current GMI by 43% using the formula we established previously. If I had a monthly salary of \$2,990, the most debt a bank would let me carry would be \$1,285.70.

Is there any significance to this for us? My total monthly obligations, including my mortgage, cannot be more than \$1,285.70 (though some institutions are lenient with this criterion; as long as your debt-to-income ratio is less than 48%, you should be fine). How much of a monthly home payment would be manageable for you? To get to the 43% payment, we’ll deduct the total debt sum from the minimum monthly payments (\$1,285.70 – \$535 = \$750.70). My monthly home payment could be as low as \$750.

Finally, the question of how much house we can buy becomes relevant. If we use the present interest rates to calculate a minimum dollar amount per \$1,000, we find that if you could get an interest rate of around 5.5%, your payment would be around \$5.5 per \$1,000. If you can afford a \$750 monthly mortgage payment, divide that number by 5.5 to get \$136.36, and increase that number by \$1,000 to get the maximum loan amount you can reasonably afford. Your budget limit will soon be known to us!

OK, so most banks will demand a down payment unless you qualify for a USDA loan or a similar program. (no down payment required). Using the following formula, you can determine what percentage of the Purchase Price you would need to put down to get the financing you want, assuming a 3.5% down payment.

Your Loan-To-Value (LTV) is the proportion of your loan to the value of your house or the purchase price expressed as a percentage, and it is calculated as follows: Loan Amount / 96.5% (or 100% – 3.5%)

136,360 * 96.5% (or .965) = 141,305.70

### You’ve finally reached an affordable amount, so congrats on that!

There is still much to do before you can buy a home, but at least you know how much house you can afford based on your current level of debt and salary. See http://homeowners-firsttime.blogspot.com/ for my site. This website aims to make the home-buying procedure easier by removing the element of surprise. I appreciate your sharing in my education.