How much house can I afford? Well, that's a question we hear a lot, and we're going to talk about it now. I'm Sandy Curtis with Berkshire Hathaway, Bowen Realty, in Hagerstown, Maryland, and today we're discussing how much do you need to make to buy a house?
There's a lot of factors that go into a mortgage. The three main things that are going to affect your ability to buy a home are your credit score, how much you have to put down on the mortgage, and your debt-to-income ratio.
The higher your debt, the higher your interest rate could possibly be. The lower those numbers are the better. When bankers are doing the numbers, they take your income and then they also take your outgoing bills or debt, and then they run the numbers to make sure that you fit within the criteria of the loan that you're looking at.
No more than 28% of your monthly income should be used towards your monthly mortgage payment, and no more than 36% of your monthly income should go towards your debt. So, how much of a monthly mortgage payment can you afford to pay? Well, based on the 28/36 rule.
Let's use an example of $5,000 gross monthly income. That's just a general round number. It's easy for me to remember. So 5,000 gross monthly income, where would your mortgage payment need to be to be below the percentage that it's acceptable by your lender for your mortgage payment? Let's use an example of $1,400 a month in mortgage, at a 5,000 monthly gross income. That puts you at that 28% debt-to-income for your mortgage payment. So you would want to keep your payment below $1,400 a month.
Now, where would that put us for your debt? Now, your debt includes your student loans, your personal loans, your auto loans, your credit card payments, child support, alimony, and then they divide all of that by your monthly income. So let's use the example that you have $5,000 coming in every month in gross, and that you have $1,800 in debt that you are paying out every month. Doin' the calculation on that brings us at 36% of your debt-to-income ratio. So you're gonna wanna pay those bills down sooner rather than later, because the more debt you put on there the higher that percentage is going to be, and the less likely you are going to get qualified for a loan.
The quickest way to do these numbers is to reach out to your lender and ask them to run the numbers for you. That way they know that the taxes, the hazard insurance, and your homeowners association, any other additional fees that are needing to be paid towards that property, are included in the estimated monthly mortgage payment.
Keep in mind that those numbers are the highest numbers. So it's in your best interest to keep those numbers below 28 and 36. Just because you have money every month doesn't mean that you necessarily need that fourth bedroom if there's only two of you living in the house. Keep your monthly housing bills down below 28%. Honestly, I would keep it below 25%.
And if your debt is at 36% or higher, start working on paying that debt down. The sooner you have that debt down, the sooner you can start saving money to go towards your down payment on your purchase. Keep in mind that credit scores, the higher that credit score the better your chances of a lower interest rate is going to be. The lower your debt is the better.
And the more money you have to put down on your mortgage is also going to affect your interest rate, and in a good way.
If you have mortgage lender specific questions, I do have some lenders I can refer to you, but I do recommend that you reach out to a lender and discuss those questions with them so that you get the answers that you need.
Keep in mind that there are home ownership costs that you should be saving money for in the backend. So if you've maxed out your debt to your income, if something were to go wrong in the house, you may have an issue later on down the road, which is why you wanna keep your debt below that number. Things like your utility bills, repairs, if you have an appliance that goes bad, even routine services like pest treatment. Those are all items that you should keep in the back of your mind that could be an expense to owning that home.