# How Much House Can You Afford?

To determine your maximum mortgage amount, lenders use guidelines called debt-to-income ratios. This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts. Because there are two calculations, there is a "front" ratio and a "back" ratio and they are generally written in the following format: 33/38. The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses.

Auto or life insurance is not considered a debt. A common guideline for debt-to-income ratios is 33/38. A borrower's housing costs consume thirty-three percent of their monthly income. Add their monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of their monthly income to meet those obligations. The guidelines are just guidelines and they are flexible. If you make a small down payment, the guidelines are more rigid. If you have marginal credit, the guidelines are more rigid. If you make a larger down payment or have sterling credit, the guidelines are less rigid.

The guidelines also vary according to loan program. FHA guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41. Example: If you make \$5000 a month, with 33/38 qualifying ratio guidelines, your maximum monthly housing cost should be around \$1650. Including your consumer debt, your monthly housing and credit expenditures should be around \$1900 as a maximum.

Once you have calculated your monthly income, multiply it by the back ratio for your particular loan. For generic purposes, it is fairly easy to work with thirty-eight. Take 38% of your monthly income or multiply it by .38. That tells you the maximum the lender wants you to spend on your housing costs and monthly consumer debt combined.

Now get out your bills and total them up to determine what you spend monthly on debt. Do not include your auto insurance or your utilities. Just creditors. For credit cards, use the minimum required monthly payment unless it is less than ten dollars. The rest should be fairly straightforward.

Deduct that amount from the total the lender wants you to spend on housing costs and consumer debt combined. Now you know the maximum the lender wants you to spend for housing costs, unless the figure is greater than 33% of your monthly income (there are exceptions, of course).

# Real Estate Trends for 2012 - By Jennifer Perdicaris Kennedy

Looking ahead these Real Estate trends will be here for a while. Find out what types of Real Estate investing is on the forefront of buyer's minds and pocket books!

1. Housing recovery: unlikely, however cautious optimism remains. A few more foreclosures have yet to flush through the market(s).

2. Mc Mansions are out: compact housing is it. Baby boomers are downsizing to more manageable homes. Generation "x'' is interested in vibrant, walkable neighborhoods, smaller compact homes. Smaller homes with more pizzazz..

4. Prices still have further to drop: 7-10% Increase in foreclosures. The 500,000 plus market (larger older homes) and conditionally and location challenged unsold properties will still need to adjust price or condition or both in order to sell. Price competitively or price it to compel a buyer to choose your property over the gazillion other choices they may have.

5. More foreclosure to come: still shaking out the over bought/over extended homeowners from the boom of 2005-07. Some homeowners that bought in 2005-07 now need to sell/move for one reason or another. Some can't afford to move because their mortgages are worth more than what the market will bear for their home and that leads to more foreclosures.

6. Mortgage rates to remain low: Long-term rates will begin to rise mid to late 2012. Rates will eventually have to go up in order for governments to begin to recover their own debt loads.

7. Mortgage Rules/Standards taking on new shape: Shorter amortization periods: no more 50 year mortgages, now down to 25 year mortgages as the norm. Increase minimum downs: more and more lenders are tightening their purse strings and will be requiring more money for down payments in order to secure financing. Longer probation periods: stricter qualifying standards over all, especially the self- employed.

8. New Construction concerns: lower new construction starts in this market (2011) could lead to a housing shortage in the future.

9. Investor opportunity: CASH investors will rock especially for bank /foreclosure sales.

10. Housing recovery dependent on employment rate: housing recovery maybe delayed due to in part of current employment rate.

Although not written in stone the above Real Estate Trends for 2012 are a guideline as to the direction the market is headed. Smaller homes, tighter financing regulations, and a few more foreclosures to get through are all what we can generally expect to see in the near future. But always remember: a good home well located, presented and priced will sell in any market!

Happy Investing!

Jennifer Kennedy is Broker Owner of Kennedy Real Estate, Edmonton Alberta. Jennifer has 10 years experience working in residential sales negotiating through boom and bust times. Staying on top of Real Estate trends gives Jennifer an edge when advising her clients in their Real Estate decisions.