Real estate continues to be one of the best investments over time. Northern Colorado especially, continues to share with the homeowners the abundance of appreciation the economy has provided us over the past 10 years. The Fort Collins-Loveland market has seen an appreciation rate of 121.8% in these past 10 years, according to the latest report from the Office of Federal Housing Enterprise Oversight. The Greeley market is showing a 115.1% appreciation rate in that same period of time.

Residential rental vacancies continue to stay low, less than 5%, as more and more people are investing in homeownership. The value of the real estate investment, along with the lowest mortgage interest rates in 30 years, allows our homeownership rate to be at approximately 68%.

With all of this good news, many people are asking, “How much of a mortgage loan can I afford?” Many renters are looking at buying their first home and many homeowners are looking at moving up in price range for either investment purposes or to have their dream home.

Mortgage loan qualification generally depends upon 5 factors: 1. Income Stability, 2. Debt-to-Income Ratio, 3. Loan to Value, 4. Property Appraisal and 5. Credit History. This article will be focusing on the debt-to-income ratio and giving general guidelines on how much of a home you can afford.

Most mortgage lenders prefer the ratio of your housing payment to your monthly gross income be no more than 28%. The housing payment includes principal, interest, property taxes, property insurance and mortgage insurance, if applicable. This is called your PITI payment. The gross monthly income consists of all income prior to federal and state income taxes, such as W-2 income, interest, dividends, child support, alimony, self-employment income, just to name a few. Let’s look at an example. If you make a total of $4000 a month pre-tax, 28% of your income may be allowed for your housing payment. That would calculate out to be $1120 PITI. With interest rates hovering around 6.50% for a 30 year fixed rate mortgage, this would allow for an approximate loan amount of $145,500. This allows $150 a month for property taxes and $50 a month for property insurance.

In addition, most mortgage lenders look at an overall debt to income ratio not to exceed 36%. This is calculated by taking the proposed PITI housing payment, plus all monthly payments, and dividing it by the gross monthly income. All monthly payments include car payments, minimum payments on credit cards, alimony, child support, installment loans, student loans, just to name a few. Let’s continue to utilize our example from above and calculate the debt payment allowed under this scenario.

36% of the total monthly income of $4000 is $1440. We already know that $1120 of this $1440 is allocated to the new housing payment. That allows $320 for all other monthly payments.

If the monthly payments exceed $320 a month, let’s look at the example another way. If the monthly payments are $500 a month, we know that $1440 is allowed for all monthly debt, as a guideline. This would leave $940 a month for a housing payment, which would calculate to a mortgage amount of approximately $117,000 at 6.50% for 30 years. Isn’t it amazing that an additional $180 in monthly debt payments decreases the mortgage loan amount by $28,500!!

Now that the mortgage loan amount has been determined, the amount of the down payment is added to the loan amount to determine the total purchase price of the new home you are purchasing. Under the first example for a loan amount of $145,400, a down payment of $20,000 would allow a purchase price of a home to be $165,400. A down payment of $10,000 would allow a purchase price of a home to be $155,400. In addition to the down payment, closing costs would be needed for approximately 3% of the loan amount.

These ratios are meant as guidelines that mortgage lenders utilize. Just because you may not fit into these guidelines, doesn’t mean that you don’t qualify for a mortgage loan. Other factors play a role into the mortgage decisioning process, such as the loan to value, the credit score, dollar amount of liquid assets, just to name a few. These examples are meant only as guidelines to help you make an initial determination on how much home you can qualify for. Your next step is to contact a mortgage lender and have a discussion with them on what loan program and amount they can personalize for you and your individual needs.