The simple rule of thumb is to spend less than three times your gross income on a home.
I’m here to show you the guts behind that little guestimate/guideline and give you some insight as to how your lender may determine whether it agrees with how much house you think you can afford. I’m going old school with pencil, paper and a wonky little calculator app. Follow along with your own calculations, if you wish, to answer the question, how much house can you afford?
Lenders consider lots of factors when they evaluate a loan application, among them, their borrowers’ Total Debt-to-Income Ratio (DTI). This magic number compares the total amount of debt you’re obligated to pay each month with your gross monthly income (income before taxes and other deductions).
Lenders may allow up to 43% for a Total DTI Ratio. But there’s no need to be an overachiever and hit that maximum. Do yourself a favor and try to keep your Total DTI Ratio low. Consider a conservative cap of 38%.
The lower you keep this number, the more financial freedom you’ll have with regard to saving and your living expenses. And don’t forget you may need to furnish your new home or buy a lawn mower or a new toilet.
Total Monthly Debt includes your Proposed Monthly Housing Expense and the rest of your debt.
We’ll circle back to Proposed Monthly Housing Expense; as for All Other Monthly Debt, include the following monthly payments in your tally:
Your lender may have additional requirements with regard to what it considers as monthly debt.
Don’t include your current rent payment or monthly living expenses like groceries, utilities, cell, cable, entertainment or gym membership. You’ll need to consider your living expenses in your total monthly budget but your lender will not use them to calculate your Debt-to-Income Ratio.
Here’s an example:
Let’s say your gross annual income is $50,000; your gross monthly income, $4,166. Based on that figure, your All-Other-Monthly-Debt-to-Income Ratio would look like this:
My, what a lovely, manageable ratio.
So if your Total All-Other-Monthly-Debt-to-Income Ratio is 15% and you set a cap of 38% for your Total DTI Ratio, you should be able to comfortably afford spending 23% of your gross monthly income toward your monthly housing expense.
Here’s how that works out, based on our example:
That $958 has to cover:
The thumb tells us that with a gross income of $50,000, you could afford a house valued at $150,000 or less. Depending on local home values and real estate tax rates, miscellaneous expenses and your down payment amount, $958 a month may be plenty or it could be nowhere near enough. Let’s see where that amount will get you based on national medians and averages:
Private mortgage insurance is most often paid monthly and by the borrower — that would be you — and is included in the total monthly mortgage payment (Total PITI).
Something to note is that private mortgage insurance is cancellable. In our examples, depending on the down payment amount and an annual home price appreciation rate of 3%, it could be cancelled between months 33 and 61, reducing your mortgage payment by the monthly MI amount — a nice little bump in disposable income!
(Yes, the end of this post is finally here — thanks for sticking with me.) Our examples show that if you have a gross income of $50,000 and a Proposed Monthly Housing Expense of $958, financing a $150,000 home with the right down payment and financing combination is very do-able.
If you’ve read all this, you still feel confused (welcome to the club), and you just want a quick rough answer – try our home affordability calculator. Rather than thinking about the price of a home in relation to your salary or savings, just enter a number you think you could live with for a monthly mortgage payment. We’ll make a lot of complicated assumptions and give you the price of a home you might be able to afford with a 10% down payment.
Important information
Important information
Exelente clase que imformacion mas importante
Is informative
Thank you for the info
very informative, thank you
It's so helpful. Thank you.
This information was very helpful
I will good taking care of my house
Good course
Helpful
It was helpful
Helpful
Quiero progresar más estar serca de mi familia
I buy a house with a front and back yard an to call me own home and tied that rent
Bien
Thanks for the extra information.
Good tips on calculation costs.
Thanks for the help with the calculations.
thank for the information
I am buying a home. But it's nice to know. Ty
It was very useful
Thank You so much very helpful with the calculations os Affording a home
Great info
Great information
ALL- Other-Monthly-Debt-to-Income Ratio.. That's priceless information. Very helpful.
Thank for the orientation I guess I'm about right now asking the deciding of buying an apartment .I will be able to keep up with the payment without a problem
Very educational , definetely love the lessons..
Not first home but can’t afford what I have. And I have very bad loan modification from 5th 3rd bank.
This was educational.
All this is interesting to learn about while I'm buying a house!!
not cheap but it would have privacy
I am buying a home
Excellent information to be educated
Vary helpful information
Thank you for the information. It helped a lot.
Very helpful information
This information helped me to better understand how a home loan is calculated and where I stand in the process. Thanks
Great insight
It help me see how I could afford a home!
Thank You for the information is important to know.
Thank You so much Wendy and Lauren they both help me during this process since is my first time buyer. Thank You for the information Wendy is very helpful and is good to know what I'm going to get into.
Good information to know.
Breaks down terminology to help you understand
Cool
Good to know
Good information for a first time buyer.
Great information
Thank you for the inportant information. Good to know
Good information
Awesome
Very affordable
Yes it is good and affordable
Great information
Is great information about buying a house
It was nice to know how you guys figure that stuff out
Good to know
thank you
It's a great orientation before buying a home.
Thank you for this information it was helpful so I can know how to budget my income in the near future I like how it should me how to budget and keep my income stable.
Very mindful about your finances
This was very helpful in my straw in buying a house. Still trying to decide if I want new builtor ready home
The information that I get here is so interested for my future, and by the information how I can get a own home, what kind of interest I going to get, my score of my credit,
Thanks for all the important info.
Good to know
Thank you for all the valuable information, I am able to gain a lots of information about home. Specially, about insurance and it’s benifits.
It was helpful and helped me understand alot
So right now am am only able to afford one house due to debt to income ratio.
Thanks for the all important information about the homebuyer and how are working with the insurance etc
