How do you know how much house you can afford, based on your income?
October 27, 2007 · Print This Article
venicefl13 asked:
the old addage 2.5 times your income i heard was not that accurate. Any help is apprecaited, thank you so much!!!!!!1
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the old addage 2.5 times your income i heard was not that accurate. Any help is apprecaited, thank you so much!!!!!!1
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Josh Dunaway has been a certfied Realtor in the suburban Chicagoland area for over 20 years. Aside from starting his own real estate company, he also owns a mortgage company as well.
Someone told me that you should earn at least 1/9th of your mortgage annually.
It’s only a guide. You need to check what your credit rating will allow. See how much you ‘pre-qualify’ for, realizing that is also only a guide that is confirmed with a ‘pre-approval.’
Yes, 2.5 times your income is not correct. It’s too high. If you purchase a home that is right at the upper end of what you can afford there is no room for life’s usual curve balls. Purchasing a home you can afford by a long shot is a much better approach.
Don’t fall into the trap of borrowing “as much as they will let you”. You will only be setting yourself up to be broke all the time.
Your mortgage payment (including property taxes and insurance) should not exceed one quarter to one third of your take home pay.
Now is a great time to buy, but don’t buy more than you can afford! Also, you should get a 15yr FIXED RATE mortgage. Your monthly payments will be higher, but your equity will increase much faster and you’ll save tens of thousands of dollars over the life of the loan.
Example:
Suppose you bought a $150,000 home at 6%.
30yr loan is 360 monthly pmts of $899.33, total $323,757.28
15yr loan is 180 monthly pmts of $1265.79, total $227,841.34
The 15 yr loan saves you $95,915.94 !!!
You supposed to be making 3 to 4 times the amount of rent you will be paying if you are looking for a house . f you are interested in buying a house. Let said your rent will be $600.00 dollars monthly, you need to be making approximately $ 3,400.00 monthly. Of course you will have to add the utilities monthly average of $.300.00 a month so will be a total Of $3,700.00 monthly. Also this depending where you living and how high is the cost of living there.You will have to check the area where you are planing on buying some places are higher than others. And of course you will have to have very good and standing credit.
Whit a score Of:
Trans union Score Now days is: is 640 to 840
Experian Now is: 635 to 840
Equifax Now is: 618 to 840 this are the standards today.
If you have a credit in this range with all tree company’s you will not have any trouble buying a house.
Ask your lender, because it is THEIR formula that will be law for you. Meanwhile, you are the one who really knows your own lifestyle. If it would break your heart to have to cut out a weekly fishing trip to a distant lake, then you’d better factor in that chunk of change as an expense, even though the lender really has no idea. If you are someone who really must have designer handbags and shoes, your lender doesn’t know that either. So, there are really 2 questions in your question. How much house will someone let you purchase? How much can you really afford. Private school tuition, things that you buy for your previous family, that are not in some official decree, membership at some club, a pricey hobby, a Sweetie on the side, these are all real factors that the lender doesn’t use, but YOU should.
Your net monthly income (take home pay) should be 4 x the total payment (principle + interest + taxes + insurance).
Lenders use ratios. They will ALLOW up to 32% of your gross monthly income towards your total mortgage payment and up to 38% of your gross income towards TOTAL monthly bills (this 38% includes the 32% housing). Monthly bills would be loans, child support, etc. Doesn’t include living expenses like insurance, food, etc.
For example: you earn 5000 a month gross income. 32% of 5000 is 1,600 a month for mortgage payment. 38% of 5000 is 1,900. This means that you are allowed 300 a month for other loans per month. If you have more then 300 a month in other loans, then the amount over is taken from the housing.
HOWEVER!!! what the lender will allow you to spend each month and what you SHOULD spend each month is totally different. 32% is way to much to spend on housing. I would recommend NEVER to spend more then 25% on your housing. If your income is on the lower end, then don’t spend more then 20%. Why? Because you have fixed expenses each month. A person making 3000 a month have the same food bill, electric bill, phone bill, etc as someone that has a 6000 a month income.
AND SAVE AT LEAST 10% of your income each month.
DO NOT BECOME HOUSE POOR!!!!.
Don’t worry about some formula, thats stupid. Cause everyone will tell you a different formula.
Open an Excel Spreadsheet, and document your monthly income.
Then make a section with all your monthly expenses. For example, cable, gas/electric, phone, car payments and insurance, clothing, food, gas, cell phones, water and sewer, etc. Then play with the numbers and see how much you have left over for rent/mortgage. If its not alot, consider getting your cable downgraded and stop driving long distances to save gas so you can reduce these expenses and have more for rent/mortgage.
I don’t think your income has to do with it, its also the other bills you are responsible for too. The numbers that people are citing are ridiculous. What bills do YOU guys pay?
I have been able to pay ALL expenses with less than $2000 a month, that means my income was like $500 a week or less than $25,000/year and I still had money left over to spend.