Now, let's talk about, if you have a salary of $40,000 per year, how much house could you afford? No, there's an important distinction to make here. It's how much you could, not how much you should. So how much would a lender approve you for as a max purchase price?
In our past discussions, I've taught you how to do the math by hand. What I did is, put together a Google sheet that's going to auto calculate all of this. So the download link is here: https://www.winthehouseyoulove.com/max-purchase-price-calculator. All you have to do is follow along with me, and I'm going to show you how much you can really afford with any salary, but we're going to demonstrate $40,000 a year, how much you can afford. Again, this is could, not should.
So first we need to, when you download this Google sheet or you copy it into your Google drive, you don't have to have a Google account to do this. What we first want to do is put in our gross. All right. So I can put in $40,000 as our yearly income. Now, why do we use gross lenders when they're going to approve you on a loan.
Now, when you're actually figuring out how much is a comfortable mortgage payment for you, how much you should borrow, then you're going to want to look at your net, pay your take-home pay after taxes. That's going to help you figure out what's comfortable for you.
So this is not about budgeting, this is about how much a lender could approve you for it's all based on what they're willing to give to you. Just because a lender is willing to give it to you. It doesn't mean you shouldn't take it out.
So we put in our yearly income. Now we're going to act like we're just the only buyer or the only borrower on this loan. But if you had a co-borrower, so maybe a spouse or a partner, or even a friend, you could put them and their yearly income as well. So across the top left corner of the calculator, we can see that our combined monthly incomes at 40,000 plus $0 is $3,333 per month which is the gross which can be seen at the right corner. This is going to show us an approximate order to take home pay is so assuming 20% in taxes, our estimated take home pay is $2,667 per month.
So after that, what we want to do is we want to put in our debt. So there are 10 slots for debts which hopefully should be enough to cover what you have, but in the debt section, we want to go ahead and start listing out what we have. So let's say we have a car payment, Let's say the car payment is $350.
Let's also say we have let's do, yeah, let's do student loans. Let's say a student loan is at $250. Let's say maybe those are the only debts we have, so we can see a total $600 per month. And then we can see again, total monthly debts $600 per month. So we have $600 a month in debt, $3,333 in gross monthly income.
So the first thing a lender is going to figure out is how much you can afford in your max monthly debt. That number is determined by what's called your Max DTI. And we'll talk about these numbers and how you can adjust them.
But your max monthly debt is basically how much a lender is willing to let you have in total debt. So your total monthly debts plus your mortgage payment, and then you have your estimated housing payment. So this is the max that a lender will allow you to have based on your max monthly debt and your total monthly debts as well.
Now, I'll show you how this works with the debt-to-income ratio. So based on this scenario, what this is saying is when you have $600 a month in debt, we can afford a max housing payment of $833 per month. That's actually 32% of our take home pay. So this is going to help give you a good idea to see that just because a lender will approve you for something.
It doesn't mean you necessarily should take it out because 32% is probably a little bit high as far as using, spending that much money, 32% of your take-home pay on housing. And so, at the lower right part of the calculator is breakdown of the $833. It will show the principal and interest taxes, insurance, homeowners association, and mortgage insurance costs as well for you.
So you need to break down and see how these numbers are working together. Then, it's going to reverse calculate into an estimated max purchase price for you. So this is super powerful because now you can actually begin playing with these numbers a little bit and seeing what's going on.
Now, let's see a couple of the other things that are coming together to add this calculation.
So first we have the down payment. So right now we're at 5%. Now, if you wanted to increase your down payment, let's say you went from, you went up to 20%. Watch our max purchase price change. We can see, we actually increased how much we could purchase because we put a higher down payment.
Now, something else we can do is change the interest rate. A 3% interest rate affords us a $132,000 house. A 5% interest rate, you will see that we will drop on how much we can afford by almost $20,000, just by our interest rate changing.
So really one of the best ways to figure out a good interest rate for you and your family is to shop for interest rates. The best tool for this is Credible which is also my sponsor. They're a loan comparison website. What you can do is go to their website, fill out a prequalification form. What they'll do is they'll show you pre-qualified rates from different lenders. So you can compare, which is going to be the best for you.
It really only takes a few minutes and it's not affect your credit score at all. It's going to be a soft pull, so it's not going to impact your credit score. So if you want to learn more about what rates you can qualify for, you can go to the link: https://www.credible.com/a/state-licenses/ so you can check Credible's website and fill out a pre-qualification request for full disclosure, Credible does pay Win the House You Love an advertising fee when you fill out a pre-qualification request. That's Credible Operations, Inc. NMLS 1681276, to know the states where they are qualified, please check their website.
So now that we have our interest rate figured out, we're going to put in 3% here, we can then put in our tax rate. Now I put in these estimates for taxes and insurance, and you'll see that the tax rate directly affects the taxes and the insurance rate affects the insurance.
So for instance, if we wanted to move up to a 2% tax rate, we can see these changes, the max purchase price, because our taxes increased meaning that we could afford less house. If you're not sure what these are in your area, then you can leave them. These are going to be good approximations for you to just get started. The whole idea of this calculator was to get a ballpark.
Then you can put in yearly HOA now around my area, there's really not a ton of HOAs. So I'd put zero, but maybe you have an HOA that's 500 a year, and you can see that's going to change again, how much you can purchase by about $6,000 because you increased your monthly payment, meaning you can afford less house.
Now you also have mortgage insurance as an option. Also, it's going to show you a little card, what type of loan you're using and what you can enter. So if you're putting less than 20% down, a good approximation for mortgage insurance, it's going to be 0.006 which will also fill the Mortgage Insurance field at the lower right side of the calculator.
You can also put in the years. For a 30 year loan, we can afford a $132,000 house. Now a 15 year loan, keeping the payment the same. We can only afford a $94,000 house. So it's something to keep in mind. It can be interesting for you to play around with and see how much you can afford depending on all of these different scenarios.
Now the most crucial thing about this calculator is the debt-to-income ratio. So the debt-to-income ratio is just how much debt you have divided by how much income you have. So there's actually two ratios. The first one is your housing payment. How much is your total mortgage payment divided by your income, and the next is your housing payment plus debt divided by your income. So this housing debts income ratio is going to be listed in a percentage.
That means 28% of your gross pay would be going towards the house. If you want to go moderate, you can bring that up to 36%, if you want to go aggressive, you can bring that up to 45%.
Now, as far as the max DTI, again, this is going to be your total debt. So your potential mortgage, plus all of your debts divided by your income. So conservative number is 36%, moderate is going to be 43%, aggressive is 495 and in my mind, dangerous gets up to 55%. Now a lender will actually approve you for this amount and I'll show you how dangerous this can be.
Right now with our current debts we have, we can afford a $132,000 house with 5% down. Now, again, if you're in a high cost area, obviously you're probably making more than $40,000. If you're looking to purchase a home that is much more expensive, for instance, and the local market around here, this is a very common scenario. Someone with a $40,000 income purchasing, $132,000 house.
Now, let's say we were doing an FHA loan. Well, an FHA loan, a lender will actually approve up to a 55% debt-to-income ratio, and about 36% on the front-end housing ratio. Then, we'll put in FHA's mortgage insurance number as well. So we can see on an FHA program, we can actually afford quite a bit more than with a more conservative approach.
Also what would happen if we paid off student loans, or let's say, we just didn't have student loans. We will see that nothing changes too much because we've already maxed out our monthly debt.
Let's move back our Max DTI to 49% and let's say we're actually going to do a conventional loan program. Conventional loans normally have a 49% back-end DTI. And technically don't have a front end DTI so we can move Max Housing DTI to 45%, if we're going to be more conservative on a conventional program and I'm going to readjust our mortgage insurance to 0.006. So you can see on a conventional program, if we had a high credit score, you could actually technically afford up to a $239,000 house on a $40,000 per year income.
What's crazy about this is this is 57% of your take-home pay. So you can see it beside the Max Housing Payment which is at the middle part of the calculator. 57% of your take-home pay could go to a housing payment and a lender would approve you for that. In certain circumstances, if you had a high credit score.
So you had to be very careful just because a lender is going to give you money. It doesn't mean that you should take it. So the best thing that you can do here really is to just start playing around with these numbers. So you get a better feeling for affordability.
So again, if we put back in these debts and we said, maybe we said we had a car payment here. Let's see, we have student loans. And then let's say we add a co-borrower here. Drop this back down to being something a little bit more reasonable, something that might be a little bit more, a little nicer in our budget here. So let's see, we added a co-borrower let's say they make $40,000 a year as well. Maybe all they have is a credit card and it's one 50 a month. So we can see with a co-borrower. Or paying, or we now can afford up to a $297,000 house with 5% down. And that would be 35% of our take home pay.
So just to recap, this is only covering what you could get approved by a lender. This is just to give you a ballpark idea of how these numbers work and how these are ratios and different things come into play because if you want to do a 15 year loan it's going to change how much you can afford by almost $80,000 in purchase price.
So it's really interesting to be able to play around with this and see what works, try it out. Let me know if you have any questions, but the calculator is down below for you. Again, only take out a loan for what's going to be comfortable for you to pay back in your budget.