{"id":2158,"date":"2008-11-11T05:00:08","date_gmt":"2008-11-11T13:00:08","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=2158"},"modified":"2024-03-05T11:10:24","modified_gmt":"2024-03-05T18:10:24","slug":"the-debt-to-income-ratio-how-much-house-can-you-afford","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/the-debt-to-income-ratio-how-much-house-can-you-afford\/","title":{"rendered":"The debt-to-income ratio: How much house can you afford?"},"content":{"rendered":"

Housing is the largest expense in the budget of most families. But how much is too<\/i> much to spend on shelter? An article in Saturday’s New York Times<\/i><\/a> contains a shocking example of one woman who crossed the line:<\/p>\n

What she got was a mortgage she could not afford. Toward the $385,000 cost, [Christina] Natale made a down payment of $185,000, a little less than what she took away from the sale of her grandfather’s home. The loan that made up the difference, with closing costs, broker’s fee, taxes and insurance, meant a monthly bill of $1,873.96, about $100 less than her monthly take-home pay<\/b> as an administrative assistant.<\/p><\/blockquote>\n

I am not unsympathetic to tales of financial hardship, but this stretches even my compassion. Ms. Natale (who has three children) took out a housing loan that left her just $100 a month for every other expense in her life. She shouldn’t need an outside voice to tell her that this was an impossible situation. (All the same, where were the outside voices?)<\/p>\n

Although this is an extreme example, many other people buy homes only to discover they’re in over their heads, unable to make payments. How can you prevent this from happening to you?<\/p>\n

<\/span>Debt-to-Income Ratio<\/span><\/h2>\n

Fortunately, decades of financial data have produced computerized models that help to determine how much a person can afford to spend on housing and debt. To learn more about this, I recently spoke with Robb Severdia of Guarantee Mortgage in Portland. I asked him to describe how the process works. (If I have anything wrong here, it’s my fault, not Severdia’s.)<\/i><\/p>\n

Traditionally, lenders have used the debt-to-income (DTI) ratio to estimate how much a homeowner can afford to borrow. This ratio is computed by comparing your expenses to your gross (pre-tax) income. The lower<\/i> the number, the better. If you make $3,000 a month before taxes, and you pay $300 toward debt, your debt-to-income ratio is 10%.<\/p>\n

Banks and mortgage brokers look at two numbers:<\/p>\n