Now that winter is almost over thousands of people will begin actively searching for a home. If you’re one of these people the first thing you want to ask yourself is, How much house can I afford with my salary.
This is important so that you don’t set your expectations too high and find the right home that can reasonably fit in your budget.
This can be done fairly easily by plugging your personal income numbers into a mortgage affordability calculator.
How Much House Can I Afford Rule of Thumb
To determine how much money you can borrow, lenders use qualification ratios. Not every lender uses the same ratios but most tend to be close for competition’s sake. Have you ever seen gas stations across the street from one another? Their prices are always similar. The same goes for banks. They don’t want to lose your business and their numbers will come in close to other reputable lenders. Here are some tips for figuring out home affordability using current qualification ratios.
If this young couple that I used in my example just graduated from college, had 2 car payments, and some credit card debt it is most likely that they would not be approved for a mortgage until they reduced or eliminated some debt. These qualification ratios are a pretty solid guideline to ensure that borrowers are able to make their payments and do not default on their mortgage.
How Much House Can I Afford with My Salary
Following the qualification ratios laid out above lets see what kind of house the young couple can afford. Looking online there are several sites that offer a mortgage affordability calculator to help you plan your search. For this exercise we will use Zillow and see what the above-mentioned couple can afford.
The couple has a combined gross annual income of $84,000, or $7,000 a month. Since most people do carry some kind of debt besides their home let’s say that the couple has $400 in student loan and auto payments per month. We also want the debt-to-income ratio (monthly mortgage payment) to be 25% as stated earlier. And lets also say that they have saved $10,000 for a down payment. This young couple would be able to afford a $262,188 home with a complete housing cost of $1,692 a month. This is well below the 30% that is recommended, coming in at just under 24%. Combine this with their additional $400 monthly debt payments and their maximum monthly debt comes to $2,092, or 29%.
This number provided by Zillow assumes a 3.875% interest rate over a 30-year mortgage. Of course the interest rate varies from bank to bank and is subject to change over the course of the year. If you want to compare different mortgage rates in your area there are great online tools like the Bankrate mortgage calculator that does the legwork for you.
Remember that just because you can technically afford a more expensive house doesn’t mean that you should. Be sure that you can live comfortably and that you are able to save money (it is recommended that you save 20% of your income). Think about your long-term goals and don’t become house-poor. In other words make certain that you are able to enjoy life and not get bogged down by your house payments.
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