You are shopping for a house and wonder what you can afford

You are shopping for a house and wonder what you can afford. Banks look at collateral, creditworthiness and capacity (ability to pay) when making loans. Assume you have sufficient downpayment and credit score. Your bank has a requirement of 28% housing expense ratio and your gross monthly income is $5,450. How much can you afford to pay in principal, interest, taxes an insurance (PITI) each month?

Solution

Maximum monthly PITI=expense ratio*Gross monthly income=28%*5450=1526

Hence one can afford to pay 1526 each month for PITI