Key insights

• Most experts recommend spending a maximum of 28-35% of your pre-tax income on your housing expenses.
• It’s important to keep in mind that other debt obligations — like student loans, car payments and credit card minimum payments — will also be factored in when you apply for a loan.
• While expenses like groceries, gym memberships and cell phone plans won’t be considered by a lender, it’s important to minimize this spending so you can easily meet your monthly debt obligations.

Understanding your housing expenses

When a lender reviews your loan application, their main job is to verify that you are a low-risk candidate who will be able to cover your monthly housing expenses for the full life of the loan. To do this, they will first calculate your monthly PITI:

• Principal of the loan
• Interest on the loan
• Taxes (estimated from annual payment)
• Insurance (estimated from annual payment)

While every lender is different, and every loan application is reviewed independently, the general rule of thumb is that your monthly PITI should be between 28-35% of your monthly income before taxes. This number is known as your front-end debt-to-income ratio.

Understanding your debt obligations

Of course, you may have other long-term loans or debt obligations that you pay each month. Lenders will also take these debts into consideration as they review your loan application.

The easiest way to think of a debt obligation is to consider who you are paying back. Common debt obligations include:

• Student loans
• Car payments
• Child support payments
• Credit card minimum payments (if you have a long-term balance you are trying to pay off)
• Medical or hospital bills

To calculate your back-end debt-to-income ratio, the lender will add up your monthly debt obligations, including your hypothetical monthly PITI. They will divide that by your total monthly income before taxes.

Typically, lenders are looking for a back-end debt-to-income ratio of 35-45%. But again, every lender varies and your personal financial history and income history will also be factored in.

What about other expenses?

You have daily, weekly and monthly expenses that won’t necessarily be taken into account by a lender — but that doesn’t mean you shouldn’t think about them as you begin the path to homeownership.

Before you apply for a mortgage, take stock of your monthly expenses, including:

• Groceries
• Gas or transportation costs
• Restaurants, coffee shops and gas station pit-stops
• Mobile phone plans, cable television plans and streaming services
• Shopping and gifts

No one is perfect, and it’s likely that you could tighten up one or two of your spending categories without too much effort. Your lender may not notice, but you’ll find it easier to afford your monthly PITI and debt obligations when you minimize your other expenses.

For more information as you begin your homebuying journey, reach out today.