Determining Your Budget

Through the use of our unique computerized system and specialized financing skills, the Buschs and their team, together with our Princeton Mortgage Corporation loan officer (Sheree Sachs), can define your maximum home purchase price with affordable monthly payments under mortgage plans designed to meet your special needs. In determining your budget, you first need to know about PITI, which stands for the four factors that determine your monthly payments:

Principal

The amount of your monthly payment that is used to repay the mortgage loan.

Interest

The amount of your monthly payment that is the finance charge on the mortgage loan.

Taxes

The amount of your monthly payment that is used by your local government to supply services. Federal and State.

Insurance

The amount of your monthly payment that protects your home against damage caused by such hazards as fire.

Mortgage Qualification Formulas
(Debt to income ratios)

All lenders use two formulas, commonly called ratios, to determine the size of mortgage for which you are qualified. To get a good estimate you need to consider both ratios. The actual ratios vary according to the program and your down payment.

28% Ratio This ratio is based on your gross monthly income, without considering recurring monthly debt payments. To use this ratio, multiply your monthly income by 0.28. The result is the amount you can afford to spend each month on PITI. For example, let's look at a family with a monthly income of $7,000. Applying the 28% ratio, they can afford to spend:   $7,000 times 0.28 = $1,960 a month PITI 

36% RatioThis ratio is also based on your gross monthly income, but additionally considers recurring monthly debt payments. For the typical family with long term debts, this ratio provides the best estimate of mortgage borrowing power. To use this ratio, multiply your gross monthly income by 0.36. The result is the amount you can afford to spend each month on PITI and long term debts. For example, let's look again at a family with a monthly income of $6,500 and several long term and revolving (credit card) debts. First, we need to multiply their gross monthly income by 0.36:  

$7,000 times 0.36 = $2,520 for PITI and long term debts.  Next, we need to add all their monthly loan payments:

$240 Car Payment
$  75 College loan payments
$105 Credit card payments
$420 Total payments

Finally, subtract their recurring monthly debt payments from the amount they can afford to spend:   $2,520 minus $420 = $2,100 for PITI  Based on the calculations we made for this family, with long term debt they should be able to afford $2,100 a month for PITI. The next step is to see how large a loan this allows.   

Lets look at your mortgage taxes & insurance in the previous step, we calculated our typical family's PITI budget as $2,100 a month. To determine how much mortgage they can afford, we must know how much they will pay for taxes and insurance.

Property taxes and insurance vary, depending on where you choose to live and the cost of your home. Your Weidel sales associate, intimately familiar with this area, is your best source of information about taxes and insurance.  

To continue with our example of a typical family, let's assume their monthly payments for taxes and insurance are $300. This represents $265 a month for property taxes and $35 a month for homeowners insurance. With their taxes and insurance paid, our typical family now has remaining:  

$2,100 minus $300 = $1,800 for principal and interest 

Their next step is to determine how large a mortgage they may get for their $1,800.

Principal & Interest

The largest part of your monthly mortgage payment goes toward principal and interest. The following chart shows monthly charges for principal and interest at various interest rates. Values in this chart are based on a thirty year mortgage; shorter length mortgages require higher monthly payments. 

Mortgage 
Amount

Interest Rate
4% 5% 6% 7% 8% 9% 10%
$100,000 477 537 600 665 734 805 878
$200,000 955 1074 1199 1331 1468 1609 1755
$300,000 1432 1610 1799 1996 2201 2414 2633
$400,000 1910 2147 2398 2661 2935 3219 3510
$500,000 2387 2684 2998 3327 3669 4023 4388
$600,000 2865 3221 3597 3992 4403 4828 5265

From this chart, the range of mortgages for which our typical family qualifies is approximately $300,000 at 6%. If the family has no recurring long term or revolving (credit card) debts, they will qualify for a larger loan amount. In addition, there are many loan programs that offer more flexible ratios to qualified borrowers. Our Princeton Mortgage Corporation Loan Officer (Sheree Sachs) is available to provide you with any necessary guidance or information with no obligation. Call (800)-635-0977 Ext. 359 or E-mail her at ssachs@princetonmortgage.com.

Next, finding a neighborhood