 TITLE: Do I Earn Enough to Afford a $200,000 Mortgage? CONTENT: Debt-to-Income Ratio and the 28\/36 Rule\n---------------------------------------\nThe 28\/36 rule refers to two separate but related measurements of debt-to-income ratio (DTI)—the portion of your monthly income used to cover debt payments. Lenders use both versions of DTI to evaluate your ability to afford your mortgage payments and determine whether you qualify for a loan:\n*   The \"28\" part of the 28\/36 rule refers to what's known as front-end DTI—the percentage of your gross monthly income (earnings before taxes and any other deductions, for example) represented by your housing costs. To qualify for most conventional mortgages, the monthly payment on the mortgage you've applied for cannot exceed 28% of your gross monthly income.\n*   The \"36\" portion of the 28\/36 rule refers to what's known as back-end DTI, or the percentage of your monthly gross income used for all debt expenses, including mortgage payments. To qualify for most conventional mortgages, your total debt expenditures cannot exceed 36% of your gross monthly income.\nAs we'll see, several federally backed mortgage programs allow exceptions to the 28\/36 rule, but these guidelines apply to nearly all conventional mortgages.\nOther factors lenders look at include:\n*   **Your credit score(s) and credit history**: Loan applicants with higher credit scores generally pay lower interest rates on mortgages and other loans; those with lower scores may be charged higher interest rates and fees—both of which can mean higher monthly payments.\n*   **The amount of your down payment**: A down payment of 20% of the purchase price is the standard requirement, but many lenders allow borrowers with good credit to make lower down payments in exchange for higher interest rates or fees. When the down payment is less than 20%, the borrower is also required to purchase private mortgage insurance (PMI).\n*   **Your savings or other assets**: You might be able to withdraw savings or convert assets to cash to cover your monthly loan payments.\n*   **The market value of the house you want to buy**: Since the home you buy will secure your mortgage, its value is important to lenders.\n*   **Your total debt**: This includes the amount you pay each month in debt payments, and how much the payments on your mortgage will add to your monthly debt spending.\nNo matter how great your income is, you still may be disqualified based on other issues. It will likely prove difficult to get a mortgage if you have a recent bankruptcy on your credit report, for instance.\nThe lender uses the above factors to decide whether or not it will to lend to you and, if you qualify for a loan, the lender uses the same factors to determine:\n*   The amount it's willing to lend you.\n*   The length of your repayment period (how many monthly payments you'll have to make to pay off the loan).\n*   What interest rate it will charge on the loan.\n*   How much it will charge you in up-front fees, or \"points,\" for issuing the loan.\n*   Whether you'll have to buy PMI. PMI is typically required if you're putting down less than 20% of the purchase price as a down payment.\nTotal loan amount, repayment period, interest rate and fees, and PMI (if any) all combine to determine your monthly payment amount. END