Limit All Discretionary Spending
If youve experienced a recent financial shock like a job loss or unexpected big bill, you may be able to help yourself by limiting or eliminating discretionary spending for a while. Budget only for the things you must have.
This definitely isnt fun, but it may be a necessary measure for you to take until a long-term solution is in place and the urgency that led to an austerity budget has passed.
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Our Recommended Percentage Of Income For Mortgage
At Rocket Mortgage®, the percentage of income-to-mortgage ratio we recommend is 28% of your pretax income. This percentage strikes a good balance between buying the home you want and keeping money in your budget for emergencies and other expenses. However, its important to remember that you dont need to spend up to your monthly limit. Think of 28% as the ideal amount you should spend monthly on your total mortgage payment. Remember to include your principal, interest, taxes, insurance and homeowners association dues in your total before you sign on a loan.
How Much House Can I Buy With My Current Salary
The amount of house you can buy depends not only on your current annual salary, but other factors such as your level of debt, your credit score and history, and the amount of down payment youre prepared to make.
Use our income requirement calculator to get an estimate of how much salary and combined personal income youll need to buy a home with a mortgage loan.
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How Much House Can I Afford 50k Salary
A person who makes $50,000 a year might be able to afford a house worth anywhere from $180,000 to nearly $300,000. That’s because salary isn’t the only variable that determines your home buying budget. You also have to consider your credit score, current debts, mortgage rates, and many other factors.
Dont Forget To Factor In Closing Costs
Alright, dont freak out here. But a down payment isnt the only cash youll need to save up to buy a home. There are also closing costs to consider.
On average, closing costs are about 34% of the purchase price of your home.1 Your lender and real estate agent buddies will let you know exactly how much your closing costs are so you can pay for them on closing day.
These costs cover important parts of the home-buying process, such as:
Dont forget to factor your closing costs into your overall home-buying budget. For example, if youre purchasing a $200,000 home, multiply that by 4% and youll get an estimated closing cost of $8,000. Add that amount to your 20% down payment , and the total cash youll need to purchase your home is $48,000.
If you dont have the additional $8,000 for closing costs, youll either need to hold off on your home purchase until youve saved up the extra cash or youll have to shoot a little lower on your home price range.
Whatever you do, dont let the closing costs keep you from making the biggest down payment possible. The bigger the down payment, the less youll owe on your mortgage!
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Take A Longer Mortgage Term
The longer your mortgage term, the lower your monthly payment. If you take a longer term, you spread your payments over a larger number of months and years, which reduces the amount youll owe each month. While taking a longer term will increase the amount you pay in interest over time, it can free up more cash to keep your DTI low.
How Much House Does Dave Ramsey Say I Can Afford
For decades, Dave Ramsey has told radio listeners to follow the 25% rule when buying a houseremember, that means never buying a house with a monthly payment thats more than 25% of your monthly take-home pay on a 15-year fixed-rate conventional mortgage.
At Ramsey Solutions, we also teach people they cant afford to buy a house until they:
- Are completely debt-free
- Have an emergency fund of 36 months of expenses
- Have a down payment of 20% or more
Why is all this important? Because when life happens, an unexpected expense or a job loss could crush someone financially if theyre also trying to get out of debt and pay a mortgage. We dont want that to happen to you.
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What House Can I Afford On 50k A Year
A person who makes $50,000 a year might be able to afford a house worth anywhere from $180,000 to nearly $300,000. Thats because salary isnt the only variable that determines your home buying budget. You also have to consider your credit score, current debts, mortgage rates, and many other factors.
That Makes Sense I Think My Credit Score Is In Good Shape Thankfully Is There Anything Else That Happens Before I Get The Mortgage
As far as the lenders work goes, not really. When determining the answer to How much mortgage can I afford?, the lender can tell you what theyre willing to give you, but it is very important that you take stock of your current situation and assess your future before committing to a loan. In other words, were back to the question of what size debt are you comfortable taking on.
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I Cant Afford A Housewhat Do I Do
Trying to buy a house when home prices keep going up can be frustrating. But with the right plan, you can do it! One big thing that holds people back from saving for a house is debt. Debt is dumb! So focus on cleaning up all your debtand never go back. Then save up an emergency fund of 36 months of living expenses to protect yourself from lifes unexpected surprises. After that, youll be ready to save for a house.
To buy a house you can afford, never buy one with a monthly payment thats more than 25% of your monthly take-home pay on a 15-year fixed-rate conventional loan . Ideally, you want to save at least a 20% down payment. For first-time home buyers, a 510% down payment is okay tooas long as the extra PMI fee doesnt jack up your monthly payment beyond the 25% rule.
After youve set a down payment goal, itll take time to save toward it. Give yourself a year or two of intense saving. Try these smart ways to save for a home down payment.
Once you have a strong down payment saved up, work with an experienced real estate agent who knows your area. The best agents will work hard to find you a house that fits your budget.
About the author
Rachel Cruze
The Monthly Income Rule
If you want to focus your search even more, take the time to think about your monthly spending. While the Consumer Financial Protection Bureau reports that banks will qualify mortgage amounts that are up to 43% of a borrower’s monthly income, you might not want to take on that much debt.
“You want to make sure that your monthly mortgage is no more than 28% of your gross monthly income,” says Reyes.
So if you bring home $5,000 per month , your monthly mortgage payment should be no more than $1,400.
“With a general budget, you want to have 50% of your income going toward utilities, mortgage and other essentials,” says Reyes. Keeping your mortgage payment under 30% of your income ensures you have plenty of room for the rest of your needs.
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Do You Have Enough Income
To afford a home, you must have enough income to cover your mortgage payments as well as your usual expenses and other debt obligations. This is a big deal because it reveals how predictable your finances are, which is crucial in making monthly payments. You have increased chances of securing approval if you have a stable long-term job with high income, which is why lenders verify your employment status.
Apart from evaluating your income, you may also submit any additional proof of income. Note that extra income is only accepted by lenders if it can get funds from those sources for at least three years. Heres a list of eligible sources of additional income:
- Payment from part-time work
- Stocks, bonds, and mutual funds
- Certificates of Deposit
The Traditional Model: 35% Or 45% Of Pretax Income
In an article on how the mortgage crash of the late 2000s changed the rules for first-time homebuyers, the New York Times reported:
If youre determined to be truly conservative, dont spend more than about 35% of your pretax income on mortgage, property tax, and home insurance payments. Bank of America, which adheres to the guidelines that Fannie Mae and Freddie Mac set, will let your total debt hit 45% of your pretax income, but no more.
I would hardly call 35% of your pretax income conservative, let alone truly conservative.
Lets remember that even in the post-crisis lending world, mortgage lenders want to approve creditworthy borrowers for the largest mortgage possible. So when you obtain mortgage pre-approval, lenders will likely approve you for a loan amount with payments of up to 35% of your pretax income. That may tempt you to take on more home than you should. But dont just assume that because the bank approved it, you can afford it. They are two very different things.
Remember: The more you spend on your home, the less you have available to save for everything else. You may be able to afford a housing payment that is 35% of your pretax income today, but what about when you have kids, buy a new car, or lose your job?
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What Is The 80/20 Rule In Savings
Quite simply, the 80 20 rule for saving money states that 80% of our outcomes are the direct result of only 20% of our actions. It’s something that can be seen and used in a wide range of industries and settings. Approximately 20% of a company’s customers account for approximately 80% of the company’s profits.
Check Your Credit History
When you apply for a mortgage, lenders usually pull your credit reports from the three main reporting bureaus: Equifax, Experian and TransUnion. Your credit report is a summary of your credit history and includes your credit card accounts, loans, balances, and payment history, according to Consumer.gov.
In addition to checking that you pay your bills on time, lenders will analyze how much of your available credit you actively use, known as credit utilization. Maintaining a credit utilization rate at or below 30 percent boosts your credit score and demonstrates that you manage your debt wisely.
All of these items make up your FICO score, a credit score model used by lenders, ranging from 300 to 850. A score of 800 or higher is considered exceptional 740 to 799 is very good 670 to 739 is good 580 to 669 is fair and 579 or lower is poor, according to Experian, one of the three main credit reporting bureaus.
When you have good credit, you have access to more loan choices and lower interest rates. If you have poor credit, you will have fewer loan choices and higher interest rates. For example, a buyer who has a credit score of 680 might be charged a .25 percent higher interest rate for a mortgage than someone with a score of 780, says NerdWallet. While the difference may seem minute, on a $240,000 fixed-rate 30-year mortgage, that extra .25 percent adds up to an additional $12,240 in interest paid.
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How Much Of A Mortgage Can I Afford Based On My Salary
The amount of a mortgage you can afford based on your salary often comes down to a rule of thumb. For example, some experts say you should spend no more than 2x to 2.5x your gross annual income on a mortgage . Other rules suggest you shouldn’t spend more than 28-29% of your gross income per month on housing.
Our Take: Somewhere In Between
Not everybody is as debt-averse as Ramseyand following his one-size-fits-all advice has risks. You just have to remember: The more you spend on your home, the less you have available to save for everything else. You may be able to afford a housing payment that is 35% of your pretax income today, but what about when you have kids, buy a new car, or lose your job?
Another reader put it this way:
- Your mortgage payment should be equal to one weeks paycheck.
- Your mortgage payment plus all other debt should be no greater than two weeks paycheck.
Thats on the conservative side, too. One weeks paycheck is about 23% of your monthly income.
If I had to set a rule, it would be this:
- Aim to keep your mortgage payment at or below 28% of your pretax monthly income.
- Aim to keep your total debt payments at or below 40% of your pretax monthly income. Note that 40% should be a maximum. We recommend an even better goal is to keep total debt to a third, or 33%.
As some commenters have pointed out, while it may be possible to buy a decent home in a small midwestern town for $100,000 , workers in New York or San Francisco will need to spend five times that amount just to get a hole in the wall. Yes, people tend to earn more in these high-cost-of-living areas, but not that much more. Does it mean they shouldnt buy a home? Not necessarily. Theyll simply have to make trade-offs to buy in those areas.
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Still Confused Talk To A Loan Officer
The calculations above are really just ballpark estimates. To really know the percentage of your income that should go toward your mortgage, you also have to factor in how much debt you have and what your goals are. For example, if youre looking to start a family, you might need to put away more money for diapers, childcare and tuition savings than youre currently considering.
At Movement Mortgage, well discuss your particular citation and look at everything including your liquid assets and credit score in order to pre-approve you for a loan you can handle.
How Do Lenders Determine What I Can Afford
These are the major factors mortgage lenders weigh to determine how much mortgage a borrower can reasonably afford:
- Gross income Your gross income is your total earnings before taxes and other deductions are factored in. Other sources of income, such as spousal support, a pension or rental income, are also included in gross income.
- DTI ratio Your DTI ratio is your total monthly debt obligations divided by your total gross income.
- Your credit score is a major factor lenders look at when evaluating how much you can afford. In general, the higher your credit score, the lower your interest rate, which impacts how much you can feasibly spend on a home.
- Work history Lenders look for a stable source of income to ensure you can repay your mortgage. When you apply for a loan, youll be asked to provide evidence of employment from at least the past two years. If you work for yourself, youll be asked to provide tax returns and other business records.
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Tips For Buying A Home
In order to help ensure that you can afford your home and maintain it over time, there are some smart measures you can take. First, save up a cash reserve in excess of your down payment and keep it in reserve in case you lose your job or are unable to earn income. Having several months of mortgage payments in emergency savings lets you keep the house while looking for new work.
You should also look for ways to save on your mortgage payments. While a 15-year mortgage will cost you less over the loan’s life, a 30-year mortgage will feature lower monthly payments, which may make it easier to afford month-to-month. Certain loan programs also offer reduced or zero down payment options such as VA loans for veterans or USDA loans for rural properties.
Finally, don’t buy a bigger house than you can afford. Do you really need that extra room or finished basement? Does it need to be in this particular neighborhood? If you are willing to compromise a bit on things like this, you can often score lower home prices.
How To Determine How Much House You Can Afford
Most people use a mortgage to buy a home, but everyoneâs income and expenses are different. Because of this, youâll want to calculate your potential monthly payment based on your current financial situation. Youâll need to calculate some figures like:
- Income: This is how much you earn on a monthly basis from your regular day job and any side hustles you have. Make sure you have gross and net numbers at the ready. You can find these on your most recent pay stub. If you have a fluctuating income, use your most recent tax returns for guidance.
- Debt: Debt consists of what you currently owe money on. This would include things like credit cards, student loans, car loans, personal loans and other types of debt. Debt isnât the same as expenses, which might fluctuate month-to-month .
- Down payment: This is how much cash youâll pay up-front for the cost of a home. A 20% down payment might remove private mortgage insurance charges from your monthly costs, but itâs not always required to buy a home. The higher your down payment, however, the lower your monthly mortgage payment will be.
- : Having good or excellent credit means you can get the lowest interest rate available offered by lenders. A high interest rate typically means a higher monthly payment.
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