Anonymous
Anonymous asked in Business & FinanceRenting & Real Estate · 10 years ago

How much should your first house cost (ratio to your annual income)?

Say you earn 100,000 dollars a year (pretax). How much should your first house cost?

I don't need to know how much your mortgage should be. I just mean the actual cost of the house (without interest).

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  • 10 years ago
    Favorite Answer

    I will give you two perspectives, one from the eyes of a mortgage company and another from the eyes of a financial coordinator.

    Mortgage company: They want you to have a debt to income ratio of no more the 50%. You can get approved for a lone with a higher debt to income ratio but you will need other qualifying factors like a good amount of liquid cash. What they do is take all of your monthly bills that report to the credit report and the monthly payment of the home (including taxes and insurance) and add them together. Then they determine how much you make a month by taking your total income and dividing by 12. Your total payments should not exceed 50% of your monthly income (before taxes).

    Financial Coordinator: They take into consideration monthly averages they get from you for food costs, medical, gas and any activities or outings you plan as well as take into consideration vacations or schooling and future home repairs so it is much more conservative. You should estimate all of your monthly spending and add it to your debt to income ration as well. You should take any average yearly vacation amounts and medical bills divide by 12 and also add them to your total monthly bills. In this way you will have a much higher debt to income ration and it is advised that the end result is at most 60% of your total income leaving you with 40% of your income for savings/investments etc.... However the catch here is that typically this puts you in a lower price range for house's then you can actually obtain and most and when I say most I mean almost all Americans prefer to go with the what they can squeeze out by the mortgage banker method vs taking the smarter smaller house conservative method.

    So the total of the house is not as relevant as the monthly payment and the monthly payment can differ greatly depending on how you qualify. Interest rates right now range from the high 4's all the way to the mid 8's depending on credit score, assets and loan program. My suggestion for a first time buyer is a traditional 30 year loan.

    Here is a formula

    Income / 12 = monthly income /2 = total of payments - all monthly debt = maximum mortgage payment. You can take that mortgage payment and punch it into any mortgage calculator online and get an idea of what your house price range will be.

    Good luck and happy hunting

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  • Krista
    Lv 4
    4 years ago

    Yes, it is called a debt-to-income ratio. Depending on what type of mortgae you get it can range from 28% to 50% depending on loan underwriting requirements. They will also look at your other debts in calculating what you can afford. The lower the debt to income ratio, the better chance you have of getting a lower interest rate. For example let's say you put 20% down a house, you have decent credit, and you borrow $300,000 for a traditional 30 yr fixed. Your payments would be around $1,750 at 7% interest rate. If you made $100,000 a year you would have a debt-to-income ratio of 21% if you made $50,000.00 you would have debt-to-income of 41%. You can go as high as 50% but you will pay a higher interest rate. I do not think there any loan programs that go above 50%.

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  • 10 years ago

    The simple rule of thumb is that the home should be about 3 times your salary. But that is meaningless.

    You think you don't know how much your mortgage should be, but that is exactly what you need to know, because the price of the house is not what matters; what matters is your monthly payment.

    The monthly payment will vary based on how much cash you put as a down payment (so therefore the mortgage amount), your interest rate, the property taxes, the insurance, whether or not you have PMI (if less than 20% down payment), any HOA association dues or any other monthly expenses associated with the particular home you buy.

    I hope we enlightened you a little.

    Summary: Cost of house - irrelevant

    Monthly cost compared to income - this is what you need to know.

    Also:

    Mortgage approval is based on income, credit score, credit history, other liabilities, cash on hand, other assets, job history and job stability.

    Source(s): Realtor
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  • Anonymous
    10 years ago

    You should keep your MORTGAGE at no more than 2.5 times your annual salary or money could be tight - the price of the house will then depend on how much down payment you put on it - expect to have to put at least 10-20% down - so a $100k income might be able to afford a $250-300k HOUSE

    also - work up a budget based on your TAKE HOME PAY, and include all your expenses, that monthly mortgage payment (Principle & Interest), PLUS property taxes, Homeowners insurance PMI if you put down <20%, water, sewer,trash that you don;t pay in an apt,and increased house utilities, due to bigger size, more appliances, etc

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  • Milton
    Lv 7
    10 years ago

    I was always conservative so I always could afford what I bought. You need to look at several figures, not just the price of the house. You need to look especially at the taxes and other costs of ownership. If you just look at % of income, you could find yourself dirt poor. In my community, the tax on the average house which is worth $350,000 is about $7500 a year. Add that to a base mortgage payment of about .8% of value a month and add $400 a month for utilities and your $100,000 income begins to look paltry. In my neighborhood, the only bill larger than the house is their liquor bill. Oh how these fools love to throw impressive parties. The only thing more expensive than the liquor they serve is the synthetic oil I put in my car!

    :Look instead at your overhead as your key figure and make it fit into about 25% of your gross income up to $100,000. Higher income changes the rules because other costs remain stable. A dozen eggs costs the same for the pauper as the millionaire, except the pauper is not likely to have all the choices in his store.

    If you are conservative when you buy, your income will go up and your expenses will be fixed. I paid off the house in 7 years by not being a house fool. Now I won four of them with 3 rented. The rentals pay for my own overhead so I can sit here and play.

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  • 10 years ago

    If you have a bunch of other debt, then your house should cost less.

    At today's interest rates, it would normally be safe to purchase a home roughly three times your annual income. As a practical matter, do the math on how the monthly payment would affect you and your cash flow. And remember, it's always nice to have about half a year's expenses in savings.

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  • 10 years ago

    no more that 15-20% of after tax net income on a 30 year mortgage

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  • 4 years ago

    That's right

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  • Anonymous
    3 years ago

    So many valid replies already for this

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  • Anonymous
    10 years ago

    you can find it in tools on this website http://sitefinance2007.notlong.com/2AAYSHT

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