What is the "rule of thumb" for how much house you can afford?

[BWVDenise]

I know there is a percentage or a formula to figure out a price range. Anybody know what it is?

 

[Galahad]

I think this is VERY old....but it used to be 2 1/2 times your annual income. So if you make $50,000 a year you should be able to afford a $125,000 house provided your debts aren't too high. I'm sure that's way too conservative for today's world, though.

 

[onecoolmama]

I heard your income has to be a third of your house cost. So, 50k a year would be $150k house price. But I know when the intrest rates were lower, people were buying more house than that.

 

[Serena]

Yeah, right now it's 33%, but I think it's much more realistic to figure 25%. It makes things easier for you.
The mortgage payment as opposed to the income, I mean.

 

[jel0511]

The general rule is that your total housing payment (which would be mortgage, real estate taxes and homeowners) shouldn't be more than 28% of your gross income and your total debt payments shouldn't be more than 35% of gross income. These are the ratios that mortgage companies use to approve people. Just take your total income BEFORE TAXES AND DEDUCTIONS and divide that number by 12. Multiply it by the above numbers and that will give you the idea of what you have to look for. When looking for a house, subtract out the real estate taxes and an average for homeowners. That will give you your mortgage payment. Use any mortgage calculator on the web for the mortgage you're thinking about and you'll see if you're in the range.

 

[JessetheCowgirl]

Wow! I can't imagine making payments on a house 3 times our annual income.

We don't have much debt--but I still can't imagine spending that much on a house. I mean, we do have to go to Disney annually

 

[Galahad]

Originally posted by JessetheCowgirl
Wow! I can't imagine making payments on a house 3 times our annual income.

We don't have much debt--but I still can't imagine spending that much on a house. I mean, we do have to go to Disney annually

But at today's rates, if you buy a $150,000 house with 20% down your P and I payments will be about $760/month, or with 10% down it would be about $850/month. I'd bet a lot of folks at $50,000 are paying that much in rent.

 

[EsmeraldaX]

Originally posted by Galahad
I think this is VERY old....but it used to be 2 1/2 times your annual income. So if you make $50,000 a year you should be able to afford a $125,000 house provided your debts aren't too high. I'm sure that's way too conservative for today's world, though.

Yikes. I'll never make 50K a year and houses around here start in the $300K range....

I better give up now...

 

[EsmeraldaX]

Originally posted by jel0511
The general rule is that your total housing payment (which would be mortgage, real estate taxes and homeowners) shouldn't be more than 28% of your gross income and your total debt payments shouldn't be more than 35% of gross income. These are the ratios that mortgage companies use to approve people. Just take your total income BEFORE TAXES AND DEDUCTIONS and divide that number by 12. Multiply it by the above numbers and that will give you the idea of what you have to look for. When looking for a house, subtract out the real estate taxes and an average for homeowners. That will give you your mortgage payment. Use any mortgage calculator on the web for the mortgage you're thinking about and you'll see if you're in the range.

I just tried this and the number I got made no sense whatsover...

I took my gross annual income, dived it by 12, then multiplied that by 28%...

Was that right?

 

[EsmeraldaX]

Originally posted by onecoolmama
I heard your income has to be a third of your house cost. So, 50k a year would be $150k house price. But I know when the intrest rates were lower, people were buying more house than that.

So do you do if your annual income X3 is not even remotely near the cost of a house?

Sorry to hijack but I always thought I would be able to buy a house within the next few years, virtually everyone who knows me has said so (as in, people who know my annual income) and I'm serious...my income X3 is not even remotely close to the cost of a starter home within commute range to my job...

Am I just doing the formula wrong?

 

[jel0511]

Originally posted by EsmeraldaX
So do you do if your annual income X3 is not even remotely near the cost of a house?

Sorry to hijack but I always thought I would be able to buy a house within the next few years, virtually everyone who knows me has said so (as in, people who know my annual income) and I'm serious...my income X3 is not even remotely close to the cost of a starter home within commute range to my job...

Am I just doing the formula wrong?

In order to afford a $300k home, as you said most starter homes in your area go for, you'd need to make approx $60k per year to get approved for a mortgage. The mortgage payment on a mortgage for a $300k home (assuming 20% down) is around $1,400 per month, not including taxes and homeowners.

This is a good website which tells you the amount of a home you can buy based on income and any debt payments. You can usually get slightly more, but this is a good guide to use. http://www.bankrate.com/brm/calc/newhouse/calculator.asp

 

[KathyTX]

Originally posted by EsmeraldaX
I just tried this and the number I got made no sense whatsover...

I took my gross annual income, dived it by 12, then multiplied that by 28%...

Was that right?

Sure...

For example, take a 50,000 annual income and divide by 12 = $4166 monthly gross income

28% of 4166 = $1166

So a house payment of $1166 is the maximum amount that a loan officer would allow this person to qualify for. That should include the mortgage payment as well as monthly taxes and any homeowner's fees.


35% of 4166 = $1458

So $1458 is the maximum amount that this person's total monthly debt payments could be. This should include car payment, credit cards, loans... but not expenses like utilities and phone.

 

[EsmeraldaX]

Well, that's depressing. Basically, by the time I am able to buy a home, I will be ready to move into a nursing home so there is pretty much no point.

Oh well.

 

[EsmeraldaX]

Originally posted by jel0511
In order to afford a $300k home, as you said most starter homes in your area go for, you'd need to make approx $60k per year to get approved for a mortgage. The mortgage payment on a mortgage for a $300k home (assuming 20% down) is around $1,400 per month, not including taxes and homeowners.

This is a good website which tells you the amount of a home you can buy based on income and any debt payments. You can usually get slightly more, but this is a good guide to use. http://www.bankrate.com/brm/calc/newhouse/calculator.asp

This link told me the most expensive home I could possibly afford would cost $5000 / no mortagage amount???



I might not have money but I think I can certainly afford more than that!

 

[JessetheCowgirl]

Originally posted by Galahad
But at today's rates, if you buy a $150,000 house with 20% down your P and I payments will be about $760/month, or with 10% down it would be about $850/month. I'd bet a lot of folks at $50,000 are paying that much in rent.

True, but you are not factoring in taxes (which are equal to 1/2 of our P and I in our current house--that would bring your example to a total payment of about $1275 before insurance of at least $100 to a total of $1375)

We went with less house than we could afford so that we can do other things with our $$$. But, that is only doable because DH has a decent income and houses here are fairly reasonable compared to other parts of the country. Our neighbor across the street still own a home on Long Island. He said that the house he bought here would be roughly 3X as much in Long Island--YIKES!!!

Esmerelda--you can make an appointment with a mortgage lender at your bank and they can give you more specifics. If your income is low and/or housing costs are high, you will have to either reduce all other debt substantially and/or save up a nice down payment. Sometimes you can also find a lease to own type offer. If you are renting now you probably have a good idea of the payment you could comfortably afford.

 

[EsmeraldaX]

Originally posted by JessetheCowgirl
True, but you are not factoring in taxes (which are equal to 1/2 of our P and I in our current house--that would bring your example to a total payment of about $1275 before insurance of at least $100 to a total of $1375)

We went with less house than we could afford so that we can do other things with our $$$. But, that is only doable because DH has a decent income and houses here are fairly reasonable compared to other parts of the country. Our neighbor across the street still own a home on Long Island. He said that the house he bought here would be roughly 3X as much in Long Island--YIKES!!!

Esmerelda--you can make an appointment with a mortgage lender at your bank and they can give you more specifics. If your income is low and/or housing costs are high, you will have to either reduce all other debt substantially and/or save up a nice down payment. Sometimes you can also find a lease to own type offer. If you are renting now you probably have a good idea of the payment you could comfortably afford.

The thing is, aside from a small credit card payment and a car payment (which is around $200 a month) I don't have any other monthly debt... no student loans, no other credit cards etc.

I guess I'm just confused because I know people who make about what I do, have a lot of debt and who had little to no money saved up who were able to get decent sized homes around here.

 

[Lisa F]

Originally posted by EsmeraldaX
Yikes. I'll never make 50K a year and houses around here start in the $300K range....

I better give up now...

How about instead of giving up you try to find a job where you CAN make a decent living? From what you've said, it seems like you have a college degree. Even two good friends of mine who are social workers are making a fairly decent living and are looking to buy a condo in NYC (queens), and social workers have the worst pay to education ratio out there (highly educated for not much pay). I know when my friend started out of grad school she was making around $25k/year but she has moved up and although she's not making quite $50k/year, it's close. Her SO has been doing this for 10 years longer than her and is making over $60k/year.

My sister has a HS diploma only, no college, and she is making $45k/year. She is planning to go back to school as soon as she can afford to because she knows she will have greater options with one than without. Now granted, she's a pretty smart and hard working person, but that is a salary one hour north of NYC (so not even IN NYC anymore)... when she was in NYC she was making even more.

I guess I am just finding it really hard to believe that someone with a college diploma could be under 30 and already at a complete dead end in their lives so that they will never make $50k in a place like Boston (it's not like you live in an area where $50k is a really really really good salary). Sounds like you need to make a change.

 

[jel0511]

Originally posted by EsmeraldaX
This link told me the most expensive home I could possibly afford would cost $5000 / no mortagage amount???



I might not have money but I think I can certainly afford more than that!

Take your annual income and divide it by 12, this is the number BEFORE taxes. For instance, if you make 60k, you'd put $5000 in that box. Then put any other type of income you receive. Then put in the amount of down payment you intend to have. Put your debts in the box for how much you pay each month. All debts are counted, student loans, car payments, credit cards, etc. Then make an estimate for homehowners and property taxes. My best guess, since you live in the Northeast, $500 per year for homeowners and around $5000 per year for taxes. Hit calculate and it will let you know the amount of a home you can purchase.

 

[EsmeraldaX]

Originally posted by Lisa F
How about instead of giving up you try to find a job where you CAN make a decent living? From what you've said, it seems like you have a college degree. Even two good friends of mine who are social workers combined are making a fairly decent living, and social workers have the worst pay to education ratio out there (highly educated for not much pay). I know when my friend started out of grad school she was making around $25k/year but she has moved up and although she's not making quite $50k/year, it's close. Her SO has been doing this for 10 years longer than her and is making over $60k/year.

My sister has a HS diploma only, no college, and she is making $45k/year. She is planning to go back to school as soon as she can afford to and granted, she's a pretty smart and hard working person, but that is a salary one hour north of NYC (so not even IN NYC anymore).

I guess I am just finding it really hard to believe that someone with a college diploma could be under 30 and already at a complete dead end in their lives so that they will never make $50k in a place like Boston (it's not like you live in an area where $50k is a really really really good salary). Sounds like you need to make a change.

Well, I have been looking for other jobs. No luck. And I don't know ANYONE my age around here who makes over 40K a year, degree or no.

 

[EsmeraldaX]

Originally posted by jel0511
Take your annual income and divide it by 12, this is the number BEFORE taxes. For instance, if you make 60k, you'd put $5000 in that box. Then put any other type of income you receive. Then put in the amount of down payment you intend to have. Put your debts in the box for how much you pay each month. All debts are counted, student loans, car payments, credit cards, etc. Then make an estimate for homehowners and property taxes. My best guess, since you live in the Northeast, $500 per year for homeowners and around $5000 per year for taxes. Hit calculate and it will let you know the amount of a home you can purchase.

Okay. I was just guessing at taxes and homeowners....I put a lot more than that...