Expert: Jessica Bryan - 7/9/2007

Question
what is the basic formula for how much of a house you can afford?  i've heard evrything from multiply your income times 3 to 27-28% of your salary (i don't recall net or gross on that one).  I've heard terms like "APR" "API" or was that "APY"...it could have been "AMI"....anyfriendly suggestons before i jump into the abyss of "the first time home buyer."  it seems truly overwhelming.  thanks

Answer
Dear Jay;
A good mortgage broker or lender can help clear most of this up for you.  However, I can give you the basics.  The average mortgage should have a monthly payment (for the principal and interest) that is about 27 or 28 of your gross monthly earnings.  The monthly payment for your mortgage  that is PITI (Principal, Interest, Taxes and Insurance) should be about 33 of your gross monthly earnings.  The 33 ratio should also include recurring monthly payments of other debts such as car payments, student loans, alimony, child support, credit cards, etc.  The additional debt people accrue can often skew the ratios and keep people from qualifying for a loan.

To address your other questions, APR is annual percentage rate which takes into account the additional costs of getting a loan and amortizes them into the loan to show what you are actually paying.  API, APY is basically the same thing--disclosing the actual cost of the loan in an annual rate.  There is also PMI: Personal or private mortgage insurance when you have the additional cost to insure your loan due to the higher risk factor or when the amount borrowed is over 80.

I hope that this helps.  Now...go visit a lender and get yourself qualified for a loan!  The lender will tell you everything you will need to know.  Don't be afraid to ask lots of questions.

Good luck and best wishes.

~Jessica Bryan