For an example calculation, lets assume you are a first-time homebuyer, have a very good credit score, a $60,000 annual household income, $250 in monthly debt payments, $20,000 to use as a down payment, property taxes of 1.25% of the purchase price you can qualify for and annual homeowner's insurance premiums of about 0.5% of the home's value.
With a 4% mortgage interest rate and a 30-year fixed-rate mortgage term, and using a 28% housing ratio, this means you can utilize $1,400 per month for Principal, Interest, Taxes and Insurance; with your down payment of just 8.89% of the home purchase price, Private Mortgage Insurance costs will also be included in that $1,400 figure.
$1,400 per month qualifies to borrow a loan amount of $204,913; add your $20,000 down payment to this, and you can purchase a home of $224,913. Of course, you’ll still need cash for reserves and to cover the loan’s closing costs.
Your debt-to-income ratio as a percentage of your income is low enough so that the back-end "cap" of 36% of your gross monthly income doesn't come into play. In fact, the 36% cap means you can carry as much as $400 per month in debts and still qualify for the amount above.
If your DTI is above 36%, don't worry. Fannie Mae and Freddie Mac are now backing loans for borrowers with back-end debt ratios of as much as 50%. While less debt is better, more doesn't necessarily mean you can't qualify for a mortgage large enough to buy a great piece of real estate that you can call home.
