How Much Home Can You Afford VS How Much Home Should You Buy?
A lot of people ask us “how much can we qualify for” or “how much should we qualify for?” when it comes to applying for a mortgage. In other words: What prices of home should I be looking at?
No matter where you are in the market, the prices are what matter. There are so many variables that go into this, but really the questions are:
How much should I be willing to spend?What do you need to keep your mortgage payment below? How does this translate to a home price?”
If you’re already budgeting (how much you spend on your car, eating out, insurance, etc.) you’re going to want to add in your potential mortgage and see how that would fit in with your current expenses.
Let’s take a look at an example.
Let’s say your income is $100,000 a year, and you have $750 dollars of credit debt. This doesn’t include your bills and the like. It’s just what shows up on your credit report. We’re also basing these estimations off a 4% interest rate. We know this isn’t where things are right now, but we want these calculations to err on the conservative side.
So, with these numbers you’d likely get approved for a loan amount up to $475,000, which translates to a 30-year fixed mortgage with a monthly payment of ~$3,000.
Could vs. Should
On a percentage basis, a loan of $475,000 with a monthly payment of $3,000 a month would account for ~35% of your income. Now this is what you could afford. But that’s not the same things as what you should afford, or budget for.
What’s the responsible amount of your income put toward a mortgage payment?
As a general rule of thumb, we recommend that you keep your mortgage payment making up no more than 25% of your annual gross income. So, if you’re making $100,000 a year and you have $750 a month in debt, we wouldn’t suggest you get a loan above $342,000, which would translate to ~$2,080 as a monthly payment.
What amount of my income should go toward my mortgage payment if I’m getting a second home?
If you’re getting a second home or a vacation home or that cabin in the woods, we still think that your combined mortgages shouldn’t require up more than 25% of your gross annual income.
Budgeting Is Important
Everyone’s financial circumstances are different, but regardless of where you live and how much you make it can never hurt to be conscientious with how you spend your money and how much you are able to put toward housing or a mortgage. This is where good loan officer comes in. They’ll help you figure out what the bank can do for you and they’ll help you identify what sort of mortgage you should get. We do this all the time and we’d be happy to help.
Let us know if you have any questions you’d like us to answer on our podcast. You can email your questions to firstname.lastname@example.org or give us a call at (602) 535-2171.Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.
Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.