It seems like Financial Planners have ratios for almost every kind of financial analysis. Home buying is no exception. When it comes to buying a home, there are three important ratios that everyone who is contemplating buying a home must know and use:
1. Home debt (PITI =principal, interest, taxes and insurance) to gross income
Your mortgage principal payment, mortgage interest, taxes and insurance should never be more than 28% of your gross monthly income.
2. Total monthly debt to gross income
Your total debt to gross income should never be more than 36% of your gross monthly income
3. Consumer debt to net income
Your total consumer debt to net income ratio should never be more than 20% of your net monthly income.
If you said ‘ouch’, you might have a Saks 5th Avenue budget on a Target salary. And, if you don’t know where you stand with your debt to income ratios, now is the time to find out.
The truth is that these ratios have never gone out of style. And, no matter what anyone may tell you, follow these ratios!! Following the debt to income ratios could help you avoid becoming a mortgage default statistic.
That’s right don’t do it! Just say ‘no‘ to higher debt ratios. Sometimes we have to defer the purchase of that mansion that we want and settle (for the time being) for a brick ranch or a cottage. I didn’t say you can’t have what you want. I am saying that you need to set your sights on what you can afford.
Remember to always buy by the numbers!
Jane Nowak is a Financial Planner with Kring Financial Management located in Atlanta, Ga. Jane’s practice focuses on Women’s Retirement Planning and Financial Planning for Women. Her articles have been published on line at NASDAQ, Financial Planning Association and Womenetics.com. Follow Jane on Twitter at: http://twitter.com/moneygal2020