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Next to, “How is the real estate market doing?” or “What will the real estate market do this year?”, we know the next most asked question for all buyers is(regardless if it is your 1st-purchase, or your 90th-purchase),
“How much house can I afford on what I make?”
Right? It’s the obvious elephant in the room when you are actually going to jump all-in and commit to buying a home.
But the knowledge of debts, bills, school loans, and everything else taking money out of your paycheck hits you hard. Al lot of people just give up at this point, “How do we even start to answer that question?” “I have no money left at the end of the month; for sure I can’t afford a house where I actually own it, right?”
We’ll get into this full force below, but let us encourage you. You may be right that buying a home this month, or even this year may not be in the cards for you. But…with the right plan, and a bit of work, owning your own piece of real estate is achievable; and it is achievable for anyone willing to make a plan and stick with the goal using consistent effort over time.
So let’s get into answering the question of how much house you really can afford.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width=”1/2″][vc_column_text]
What is LTV?
Today’s mortgage lending market is not the market it was a few years ago when the financial crises happened back in 2008 – 2010 and the housing market went crazy where many mortgages were foreclosed on. Any lender today would love to see an 80% loan to value meaning a lender will be able to secure their investment by giving 80% of the money and you bring in 20% of the purchase price or better. Check out Melissa Blevins’ video on what Loan To Value is, and how it works in the house buying process. It is a good warm up for our discussion, and it’s embedded here for you to watch.
Having any money to put down on a home (20% in our example above) just means you need to have some savings ready to spend in order to get a home ( and most people don’t even get close to 20% down payment these days). If you can qualify for a house selling for $200,000, an 80% loan is going to require you to need to have $40,000 cash as 20% down payment on the purchase…and that cannot wipe out all your money doing this. Lenders want to see a healthy overall financial picture with a savings buffer after the close of the purchase and good income history even if you can open your wallet with $40k cash and lay it on the table.[/vc_column_text][/vc_column][vc_column width=”1/2″][vc_video link=”https://youtu.be/GahX0GiW4YA”][vc_single_image image=”3791″ img_size=”full”][/vc_column][/vc_row][vc_row][vc_column width=”1/2″][vc_video link=”https://youtu.be/bqjcYoDKBIY”][/vc_column][vc_column width=”1/2″][vc_column_text]
Real Lending Requirements for 2020
Denny Ceizyk with Lending Tree has some great information on the lending requirements for 2020. This is great information you should take a look. Today’s lenders are accepting borrowers with little or no down payments; that is if you have good credit and a good debt to income ratio. Depending on the lender you can qualify for a mortgage loan with as little as 3% down payment in some cases.
Again, Melissa Blevins does great work describing what a Debt To Income ratio (DTI) is. The video is embedded here for you to sit back and enjoy.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width=”1/2″][vc_column_text]
Factor in what you make.
Another factor in what you should afford is hinged on your monthly or annual income. As a general rule (this is our opinion and not a hard and fast rule), you don’t want the cost of your mortgage to exceed 25% of your monthly net income. Your total housing cost (monthly mortgage, utilities, and maintenance) should try to not exceed 28% of your monthly net pay. If you include food in that equation, you probably don’t want the cost of housing to exceed 30% of your monthly net income. Lenders do approve mortgages that take up more than 35% of your monthly income. But lenders have to follow the requirements listed in the loan package they are trying to fit you into. Do your homework with your lending professional to see what lending product works best for your situation.
A good starting point is to use 28% of your net income as a general goal when making a budget for buying a home. Here’s a formula to help you calculate a monthly mortgage to shoot for: Take your monthly gross income and multiply by 28. Now divide that number by 100. The answer you get is what 28% of your monthly income actually is. The median annual income in Oregon for 2017 was about $73,202. If this were your income, you’d have made about $6,100 per month; 28% of that monthly income comes out to about $1,708. You should always run your own numbers to see how your situation really plays out.
All in all (and we can’t say it enough), you should talk to several lenders to get the real numbers and the amount of home loan you actually can afford*.[/vc_column_text][/vc_column][vc_column width=”1/2″][vc_single_image image=”3792″ img_size=”full”][vc_single_image image=”3793″ img_size=”full”][vc_single_image image=”3794″ img_size=”full”][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Now it’s time to have some fun. Play with a home affordability calculator.
The people at Nerdwallet have a home affordability calculator that answers that very question, “How much house can I afford?”
On the right side of the page, you can adjust your credit rating, down-payment, loan term, annual income, and monthly debts. These are all questions you should have answers to from our previous work you have been doing.
Play with the numbers on the right side of the page. Be conservative and list $5000 as your down-payment as a way to see how that number changes the home price. The constants here are your income and your monthly debt. You can even slide he monthly payment slider at the center of the page to adjust your monthly payment to see how much of a home you afford at a certain payment.
Here is the big encouragement; don’t be discouraged…you can change everything for real. You can make more money by making a job change, or adding income from a side-hustle. You can lower your debts. You can increase savings. You can do a ton of things to change the situation. Don’t feel helpless. You are in charge, and this will give you an even clearer picture of what you want to do in order to get into your first home.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width=”1/2″][vc_single_image image=”3690″ img_size=”full”][/vc_column][vc_column width=”1/2″][vc_column_text]My Real Estate Advisor Team is licensed to practice real estate as a broker in the state of Oregon and is not a licensed appraiser, mortgage broker/lender, or licensed financial advisor. Any financial advice received from the My Real Estate Advisor Team is for information only. My Real Estate Advisor Team makes no legal or promissory statements to the actual financial market at the time of this post. You should always contact a licensed financial advisor or lending professional to seek actual financial advice for your specific situation.
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