It’s time to buy a home – but how much can you afford?

When a first-time buyer or family starts looking to buy a home in Northville, Novi, Canton or even cities in Oakland county, this question comes up fairly early on.  While many would love to have a big, beautiful home with less than 20 years to its age, the reality is that not everyone can afford those homes.

Before you start looking at homes you need an answer to this question – what can you afford?

There are no concrete rules to dictate how much home you can afford when you’re buying your first home in metro Detroit.  Ultimately the amount you can afford, and what you are approved for, is determined by the Michigan mortgage lender when they calculate a variety of factors.

The number they come up with will likely be different from your own.

Debt to Income Ration with a Michigan Mortgage Lender

When your Michigan mortgage lender reviews your financials, they want to see your debt to income ratio (DTI).  This calculation is used to determine the maximum  mortgage you can be approved for.  This is not the amount you’ll actually receive, but it paints a picture of the type of home you could afford to purchase.

This looks at the expected mortgage loan size, current rates, and expected monthly payment then compares that figure to your monthly income.

The Front-End Ratio

The front-end ratio compares your expected payment to your income.  The monthly payment isn’t just the mortgage broken up over a 15 or 30 year mortgage.  The monthly payment on your Michigan mortgage takes into consideration:

• Principal and interest payments
• Monthly property taxes
• Homeowners insurance
• Monthly association dues

While there is no maximum front-end DTI, lenders ideally want to see it at 28% or less.  That means that no more than 28% of your monthly income should go toward housing.

The Back-End Ratio

This is the second component when getting approval with a Michigan mortgage lender.  This takes the expected monthly mortgage payment and bundles it with all of your monthly obligations.  That includes things like:

• Student loans
• Credit card payments
• Car payments on auto loans
• Installment loans
• Child support or alimony payments

Overall, your Michigan mortgage lender will want to see a back-end ratio of 36% or less.  With that said having a total DTI over 36% doesn’t disqualify you – in some cases it can be as high as 45% and you might still get approved.  This does however affect just how much home you can afford when you’re buying a home in southeast Michigan.