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Module 3
Preparing for Home Ownership
Affording Your Dream
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Did You Know
  • You can find out how much you can afford before you start looking for a home to buy.
  • A monthly payment on a home loan and related costs consists of several parts.
  • There is a difference between being pre-qualified and pre-approved for a home loan.
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What Can You Afford?

Know What You Can Buy Before You LookBefore you look at houses for sale, you should find out how much you can afford to buy. One of the benefits of home ownership is the buildup of equity in the home. In later years, if the value of your home increases you could sell your first home and use the home equity to buy another home.

Lenders Have Predetermined QualificationsWhen considering your qualifications for a loan, lenders have predetermined parameters for how much of a person’s income should be allowed for their housing expense and for their total debt to income ratio. These qualifying ratios vary by lender and may be somewhat flexible, depending on the loan product that is being offered. For example, there are many lenders and types of loans today that use 33/38% for qualifying ratios.
  • The first number (33%), also called the “front-end ratio,” is the amount of monthly income allowed for the total housing expense. This includes the home loan payment, which includes a monthly amount for real estate taxes and hazard insurance, any required mortgage insurance, plus any homeowner association fees that apply.

  • The “back-end ratio” of 38% includes the housing expense plus all other long-term monthly debts. Examples of long-term debt are payments on cars, credit cards, student loans, and any other fixed obligations.

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