100k Salary How Much house Can I afford
100k Salary How Much house Can I afford
Debt is serious and money should be borrowed only after careful consideration. J. Reuben Clark described it well:
“Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation. . . it has no love, no sympathy; it is as hard and soulless as a granite cliff.
Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”
Unfortunately, too many people have developed a casual attitude toward debt.
Large mortgages are common and people seem to take them on without a second thought.
Looking for advice on mortgages can be tricky.
A mortgage banker will tell you how much they can lend, but they don’t know enough about your personal financial situation to tell you how much you should borrow.
In fact, if you borrow as much as a mortgage lender is willing to give you, I can almost guarantee you won’t have enough money for your other goals.
Mortgage underwriting relies heavily on a metric called the Debt-to-Income ratio or DTI. DTI is calculated by adding up the monthly payments required to service all your debt, including your mortgage, student loans, car payments, credit cards, etc.
PLUS property taxes, homeowners insurance and HOA fees and dividing them by your gross income.
Generally, mortgage lenders like to see DTIs less than 43%. However, if you borrow up to that 43% DTI limit, you are going be house poor. Let’s do some numbers.
100k Salary How Much house Can I afford – Case
Suppose your household annual income is $100,000.
If you have good credit and no other debt, the 43% DTI rule means a mortgage lender will assume you can support a monthly payment of about $3,500, including property tax and insurance.
Given current interest rates, this means they would probably approve you for a mortgage limit of around $650,000.
However, do you really want to live with a $3,500 monthly payment? After taxes, that would leave you with only about $3,800 each month to pay all your other expenses—not much when you consider the cost of food, clothing, utilities, medical care, home maintenance and transportation.
And what about saving for college or retirement?
A better way to think about your mortgage is to figure out how much of a house payment you can afford without neglecting your other financial priorities.
Once you have that number you can work backward to see how much house that payment will buy.
If you go the other way (i.e., finding the house you like and then trying to qualify for the mortgage you need to buy it) you will likely overspend. We all tend to want more than we can actually afford.
The 3 Factors That Decide How Much House You Can Afford
The good news is that figuring out how much house you can afford isn’t rocket science. It’s actually pretty easy to come up with a firm number, so you’ll feel confident during your search.
Just pay attention to these three factors.
1. Begin with Your Budget
The obvious place to start with such a big purchase is your budget. After all, you can’t spend what you don’t have.
So, get clear about what you – and, if you have one, your partner – make every month. For some of you, this might be as easy as looking at your latest pay stub.
For others, it might be a bit more complicated. If you earn a commission, for example, take your average paycheck for the past six months.
Be sure to include every stream of revenue, too. This would even include things like alimony payments and investment dividends.
Go through this exercise even if you already have a monthly budget. It never hurts to double check and, when it comes to deciding how much you can spend on a house, it is always better to be safe than sorry.
2. Your Savings
It probably wouldn’t be wise to factor in your savings as a means for making monthly mortgage payments. Those funds would eventually become depleted, at which point, your income will have to suffice.
That being said, your savings can help with the down payment. The more you’re able to pay down right away, the less your monthly mortgage payments will be, which will also mean you can afford more house.
As such, if you haven’t begun saving for a home, now would be a good time to start. It can make all the difference when you eventually decide to purchase your house.
3. Your Current Expenses
Finally, you want to calculate your monthly expenses.
Again, if you already have a monthly budget, you most likely know what you’re spending every month on things like groceries, utilities, and your phone bill.
Still, it’s definitely worth double checking.
Leave out rent, though.
If you can’t break your lease, you might have some overlap when you’re paying your rent and your mortgage. However, that won’t last forever, so your monthly rent shouldn’t factor into how much house you can afford.
How Much House Can I Afford on any salary
Before trying to find out how much house you can afford, determine if you’re financially ready to buy a home by asking yourself these questions:
- Am I debt-free with three to six months of expenses in an emergency fund?
- Can I make at least a 10 percent (preferably 20 percent) down payment?
- Do I have enough cash to cover closing costs and moving expenses?
- Is the house payment 25 percent or less of my monthly take-home pay?
- Can I afford to take out a 15-year fixed-rate mortgage?
- Can I afford ongoing maintenance and utilities for this home?
If you answered no to any of the above questions, now may not be the right time to buy a home. Just married? Wait at least a year before buying a home, even if your finances are in order. Don’t add the stress of a home purchase to a brand-new marriage, and never buy real estate with your significant other unless you’re actually married!
Understanding the 28 Percent Rule
The most common rule for deciding if you can afford a home is the 28 percent one, though many are out there. You should buy a property that won’t take anything more than 28 percent of your gross monthly income.
For example, if you earned $100,000 a year, it would be no more than $2,333 a month. Now keep in mind that that cost must cover everything, including maintenance, taxes, insurance, and HOA fees. The lender will use a debt-to-income ratio to see if you can afford this space, and this is called the front-end ratio.
How the 36 Percent Rule Differs?
Another debt-to-income ratio is called the back end. This ratio is different because it looks at your housing costs in addition to other monthly obligations. If you have an automobile payment, credit card debts, or child support, it will be figured into this equation.
When you apply the 36 percent rule to your $100,000 a year salary, your monthly payments should not exceed $ 3,000 a month. Now, some lenders are a bit more lenient and will let you go up to as much as 42 percent, but you should be wary of getting in over your head and stretching your finances to the breaking point.
The Real Cost of a house monthly payment
Several different costs are included in a mortgage payment.
It’s important to plan for these expenses, too, so you get a more accurate estimate of what you can afford based on your monthly budget.
The four main components of a mortgage payment are principal, interest, taxes, and insurance.
- Principal and interest— Principal refers to the loan amount. Interest is the cost of borrowing funds. Each month, a certain percentage of your payment goes toward repaying the principal, and another part goes toward interest.
- Property taxes— You’ll pay property taxes on the house, too. Lenders add this amount to your mortgage payment, and it’s paid via an escrow account. Property taxes are based on the value of your home
- Insurance— Homeowners insurance is required when you buy a house. This protects the property from damages like theft, fire, or natural disaster. You might also have to pay for private mortgage insurance (PMI) if you purchase a home with less than a 20 percent down. This insurance protects the lender if you default on the loan
- Homeowner’s association (HOA) dues— If you purchase in a community with a homeowner’s association, you’ll also pay monthly HOA fees. These fees might cover the cost of landscaping, community centers, maintenance, trash removal, etc.
Some mortgage calculators don’t factor in all the costs included in your monthly payment. This can give you an unrealistic estimate of how much house you’re able to afford based on your salary.
The reason? You have a set monthly budget — and when your ‘other’ homeownership costs are higher, there’s less of that budget leftover for your core mortgage payment. In turn, this reduces how much house you can afford.
To get a more accurate estimate of your home buying budget, use a mortgage calculator with taxes, insurance, and PMI included.
Or, talk to a lender. They can give you a free mortgage loan estimate with the most accurate number based on your finances and current mortgage rates.
Planning for your Mortgage
People often sabotage their long-term priorities because they fail to make the short-term sacrifices those priorities require.
They buy too much house for their income and they don’t have enough resources left over to properly save for retirement or their children’s education.
Make sure you include long-term goals in your cash flow planning for your mortgage.
Finally, build some cushion into your mortgage payment.
If your budget shows that you can afford a $2,500 per month mortgage payment, settle instead for $2,000 per month.
That extra cushion will give you added resilience when you confront the inevitable challenges of life.
Buying a home is one of the most important decisions you will make as it will impact your finances, family and future.
We can help you look at home buying in the context of your other financial goals and needs.
Schedule a complimentary meeting today!