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The banks will provide you with a certain amount of loan based
on their estimated decision of your ability to repay the loan. To
make this estimate, they look at your income, your available cash,
your debt, and your credit history.
There are two debt-to-income ratios that banks check based on the
information you provide on your loan application. In the front-end
ratio they check to see how much of your income would go toward
the mortgage payment. Their guideline is that your total payment,
including principal, interest, and escrow payments, should not be
more than 28% of your gross (pre-tax) monthly salary. To calculate
this for yourself, take your annual salary and multiply it by .28,
then divide it by 12. This number is your maximum total mortgage
payment per month.
Banks also check how much of your gross income is required to pay
all of your combined debts. This is called your back-end ratio
and includes the mortgage as well as car payments, credit card payments,
student loans, and child support and alimony payments. Their guideline
for this ratio is that your total debt payments should not be more
than 36% of your gross income. To calculate this for yourself, take
your annual salary and multiply it by .36, then divide it by 12.
This is the maximum allowable amount of your total monthly debt
payments.
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