Lesson Eight – How Much Home Can I Afford?
Hey Hey Future Homeowner!
I hope your morning is going well 😊. Guess what we’re doing today?! I’m sure the title of today’s lesson gave it away, lol.
Today we are going to calculate how much home you can afford! Now that you have selected the loan type it’ll be much easier to complete this task. Keep in mind this is an estimate; a lender may approve you for more, HOWEVER, you should stick within your budgeted amount; NOT your lender-approved amount. Got it?!
The last thing I want any of you to do is to walk into a bank or fill out a loan application and let them tell YOU how much home you can spend to purchase a home! No. No. NO!
So, today we’ll review two calculations, a simple one, and a more personalized one.
The Simple Calculation is:
Your Gross Qualifying Monthly Income * 43% for all debts – your mortgage would take up about 31% of your income, leaving 12% for your other debts.
Your Gross Qualifying Monthly Income * 30% for taxes – self-explanatory.
Your Gross Qualifying Monthly Income * 27% for everything else – savings, vacations, retirement planning etc.
Here’s how that would look:
Stephanie’s Monthly Gross Income is $4300/mth
$4300 * 43% = $1849 (this includes your mortgage and your other debts as well.
$4300 * 30% = $1290 in taxes
$4300 * 27% = $1161 for all other expenses.
This is the easiest way to estimate how much home you can afford, however, keep in mind, your financial picture may be different. Account for that.
If you are in a lower or higher tax bracket – make an adjustment in that area.
If you know you’re going to look for a lender that allows for a higher debt ratio bracket, make that adjustment.
If you know that you’d like to save more, increase that percentage!
Make this simple calculation work for you!
Here’s a more Personalized Calculation, which I find to be more realistic:
Derrick’s gross monthly Qualifying Income is $3800/mth. His fixed debts (excluding rent) is $572/mth
He’s looking to go FHA, and has done some research and found a lender that will allow up to 40%/50% for debt ratios.
Derrick check his mortgage FICO scores and found that they were 610, 627, 635
For FHA, Derrick knows that he’ll need to calculate two ratios; a front-end ratio, and a back-end ratio.
Since his scores are over 620, his front ratio can be as high as 40% with this lender: $3800 * 40% = $1520.
Derrick can spend up to $1520 on a mortgage payment per month. He’s a little uncomfortable going that high and would like to stay in the same price range that his rent is in, $1275.
Derrick’s back-end ratio is: $3800 * 50% = $1900
Derrick feels very comfortable with this! His projected mortgage payment of $1275 + his current debts of $572 puts him under 50% at just $1847.
He feels he should wait at least 6 more months to continue to increase his credit scores, pay down a few more debts and to save up some more money.
He feels good knowing he’s on the right track.
Assignment: How Much Home Can I Afford?
Feeling up to creating your own personalized scenario? AWESOME-SAUCE!
Grab the last assignment – My Loan Type and review the requirements for debt ratios for the type of loan you selected. Remember, your front-end ratio is just your desired monthly mortgage payment divided by your Qualifying Income.
Your back-end ratios are your desired monthly mortgage payment PLUS all of your other fixed-minimum monthly debts divided by your qualifying income.
The DTI calculations will give you a general idea of what monthly payments you can get approved for; please adjust to what you feel comfortable paying per month.
To determine how much home you can afford, meaning the total dollar amount (i.e. $168,000), visit Zillow’s Home Mortgage Calculator, click ‘advanced’, and adjust the debt ratios to match your loan type.
Remember for down payment, it must align with your loan type, if you want a $200,000 mortgage, you can’t say you have $5000 saved, you must state you have $7,000 (3.5%) if you’ve selected FHA, and so on. Also, keep in mind that all of the required funds for down payment does not have to come from you. That’s why we had the ‘Search for Free Money’ assignment.
I know you’ll have questions. So post them to our community and the Mortgage and Financial professionals are here to help 🙂
For those in the Intensive, I’ve attached an Excel Home Calculator in your original welcome message; use that for this assignment. This spreadsheet will allow you to determine the estimated total loan amount you can afford. The instructions for how to use this calculator are included in the spreadsheet. We’ll also have a VP of Mortgage Compliance that will host a Live Lesson with us that will break this down even more :).
NOTE: If your ratios are too high; determine how you can make adjustments to either your qualifying income, debts, or desired mortgage payment amount — just like in our examples.
Already future home owner, get to werk!
Tomorrow we’re going to chat about one of my favorite topics: CREDIT!
Sorry, didn’t mean to scream at you but I just love talking about credit 😊
You’ve already seen the minimum scores necessary to get approved with each loan type, and I’m hoping and praying you’re not looking at the minimum as your goal. That’s like going to class and asking the teacher what grade you need to pass and just focusing on that. Don’t. Do. It.
Try to get to at least a 640+ middle score; your interest rate will thank you.
See you tomorrow!
Your Partner in Prosperity,