One of the first things you do before buying a home is figuring out a budget. This helps narrow the search by giving a clear idea to Spartanburg new home builders as to what you can afford. As a result, you save time on looking at countless houses that don’t suit your needs. Here’s how you’ll know.

Knowing about your front-end and back-end debt-to-income ratio

Before your lender allows you a loan, they want to ensure that you can repay it. They’ll analyze various factors on your application to check how much of a risk you pose when you borrow.

Your front-end debt-to-income ratio is the percentage of dividing monthly mortgage payments by your monthly income before tax deductions. If you get a lower percentage, it means that you’re spending a smaller amount of monthly income on making housing payments. Conversely, a larger percentage means a bigger portion of your income will go towards payments. Lenders prefer a below 29% front-end debt-to-income ratio. A higher ratio means a lesser chance of having your application approved.

On the other hand, the back-end debt-to-income ratio compares the sum amount of your monthly payments to your income. This means you have to sum up all your current payments that require you to pay a minimum, such as credit accounts. You’ll have to include student loan payments, credit card payments, and car payments. Similar to front-end debt, a lower percentage of back-end debt proves you’re in a stable condition to make housing payments.

Ideally, you should have a 28 to 36 front-end and back-end ratio, but let’s get into what it means to have a higher ratio.

If you have a back-end ratio that’s higher than 30 percent, it indicates that your debt is taking up a large part of your income. You need to review your budget carefully if you’re serious about buying a house. Any higher than 35 percent means that you should either reduce your monthly expenses or find a way to increase your income. At 36 percent and onwards, you won’t be able to get a loan and it will be hard to pay other bills as well.

The LTV Ratio

This ratio compares the amount you borrow on a mortgage loan, to the actual value of the home. You determine the ratio by means of a percentage. For instance, having an LTV ratio of 95 percent means that you have to pay a down payment of 5 percent while the lender will provide the rest. A lower LTV means you’re making a bigger down payment and vice versa.

In most cases, a lower LTV helps in getting the loan approved. This is because a borrower is much less likely to default if they put in more of their own money. If the mortgage loan has a higher LTV ratio, the lender will add insurance payments to monthly mortgage payments, which increases the cost anyway.

Other Expenses

Of course, other expenses come along with buying a home. These include costs for moving, the down payment, insurance premiums, maintenance and repairs by Spartanburg home builders, and monthly utilities. It all goes to show that there are many more costs associated with buying a home than you realize and that you should make careful calculations if you intend to purchase your dream home.