Published

October 2, 2020

Today, we're talking about how much house you can afford with a $50,000 per year income. I'm going to show you how you can actually calculate this for yourself with your own income and your own situation.

So what you're going to learn is number one, why a debt-to-income ratio matters, also how to calculate your max monthly payment on a mortgage, and how to find your max purchase price.

Because ultimately, we want to know, we make this much money, how much a house can we actually qualify for? This is going to give you the answer without having to go through getting prequalified with a lender.

So first let's talk about the income in general. $50,000 per year is going to turn into a gross monthly income of $4,166 per month. Now lenders use gross income. You might be thinking well, you know, obviously I take home a lot less than my gross income. I might have taxes and I also have to pay maybe insurance or retirement. So, I know it can be tricky, but lenders use gross income. That's what all loan programs are based off of. So we're going to use those numbers here, $4,166.

Now what we want to do is we want to add up all of our debts and don't think of expenses. Think of only true debts. So for instance, let's say we have a car payment for $300 per month. We have a credit card, let's say it's $200 per month, and Student loans. Let's say we have $20,000 in student loans, but we're on an income based repayment plan. And right now we're not paying anything. So if we're on a conventional loan, we can actually use $0 per month as our student loan payment. Then, if you have child support or alimony, you would include that expense in there as well. So you're only calculating debts plus alimony and child support.

Things that are not included are things like your phone bill. Your phone bill is not included, utilities not included, rent not included, taxes not included in your debt-to-income ratio and any other living expenses. So gas, groceries, whatever other spending you do. It's not included in your debt-to-income ratio. So when we go through an add all of these together, so let's think that our total debt payment is $550 per month. That's what we pay in true debts per month.

So, to figure out the debt-to-income ratio, we take our total debt payment divided by our gross monthly income. And what that does is that gives us a pre-mortgage debt-to-income ratio of 13.2%. What I mean by pre-mortgage is this is your debt-to-income ratio without considering you're going to have a mortgage payment added. So something that's interesting is that your rent payment is not included in your debt-to-income, but your mortgage payment, your future mortgage payment is.

So what we have to do, it was figure out how much our estimated mortgage payment is going to be to be able to see what our debt-to-income ratio limit is going to be. So we have to do a little bit of a backwards work around to figure out how much house you can afford. So we first need to figure out how much debt we have and what that looks like before we can figure out how much house we can afford here.

So let's figure out first our max monthly debt that we can take on. Again, our gross income, the $4,166 per month. Now, if you're putting in your own income, it might be a little bit different for you here. Then what we have to do is we have to pick a max debt-to-income ratio. So this is all going to depend on the specific loan program that you're using. So maybe it's a conventional loan, an FHA loan, a USDA loan, a VA loan. They all have different debt-to-income ratio requirements. So to be safe, we're going to use 45% as our debt-to-income ratio in this example.

But if you're on a conventional loan and you have a high credit score, you can actually go up almost all the way to 50% debt-to-income. For FHA loans, that looks closer to 55%. So it depends on your credit and what type of loan you use, but we're going to use 45%. It's going to be a safe ballpark range for you to figure it out in your debt-to-income ratio.

So what we do is we take our monthly income and multiply that times 45%. So $4,166 per month times 0.45 gives us a monthly max debt of $1,874.70. So what this means is this is how much a mortgage lender is going to say, it's fine for you to have in debt payments monthly. They don't want you to go above that.

So, the next step here is we take this number and we subtract our total monthly debt from it. So we take $1,874.70 minus our monthly debt, which is $550. And that gives us our max mortgage. Okay. Our max mortgage payment now in this scenario is $1,324.70. So basically a lender would say, if the cap for your debt-to-income ratio was 45%, the biggest mortgage you could take on was about $1,300.

Now, just because you can doesn't mean that you should just because a mortgage lender is going to give you money doesn't mean that it's a good choice for your budget and your family moving forward. Ultimately you have to make that decision based on what you're comfortable spending each month, not just what a lender is willing to give to you.

So this $1,324.70 what's included in here? Well, what's included is principal and interest ,any mortgage insurance if you're paying that, any property taxes, and then any homeowners insurance, and if there's an HOA, HOA needs to be included and that as well.

So a lender would basically be saying: all of those things combined can not exceed $1,324. Now that we have that number, this is the maximum monthly mortgage payment we're allowed to spend. We can now do some reverse math to figure out how much can we actually afford in the purchase price.

So, before we do that, let's have a quick CalmMoment. So there's a lot of numbers here and figuring out what you qualify for can be one of the beginning stages of feeling some anxiety and overwhelm going through this process, because you're trying to manage a lot here. Just know that this is all here as a ballpark for what you can afford. Getting these numbers done, a lender can do these very quickly for you, in software that's designed to help them do this very quickly.

So if you need help working through this, reach out to a lender and ask for a ballpark figure of what that would look like and how much you could possibly qualify for, even if you're not ready to purchase for another year or two, that's perfectly fine to reach out and see, hey, maybe you can establish a relationship with them and get some help along the way. This is just here as a ballpark. That way you can start getting an idea of a realistic goals.

Because the biggest issue is when you're going into the home buying process and you're seeing all of these homes and maybe they're for $300,000, but then you find out later in the process, your budget is actually closer to $200. That creates a lot of friction and frustration and anxiety because you were spending all this time on something that you weren't able to qualify for.

So figuring out this step is going to help you manage your expectations and know what to expect moving forward. So what we're going to do is we're going to hop over to Trulia's mortgage calculator, here's the link: https://www.trulia.com/mortgage-payment-calculator/.

Trulia's mortgage calculator, this is going to make it really easy for us to kind of do some reverse math here. So the first thing we want to start off with is we want to enter in your zip code, then what we want to do is to start with the down payment. So how much money are we willing to spend in our down payment? Now this is not including closing costs. Closing costs are separate. So keep that in mind, but let's say maybe we're willing to spend $20,000. So now what we can do is we can actually take the home price slider and start moving this until we hit our target for $1,324 per month.

We can't hit the exact amount sometimes, but the ballpark range here, $1,307 per month is a home price of $235,000. So long story short in this scenario with $50,000 a year in income and the debts that we have $550 per month in debt payments, we can afford up to a $235,000 house. If we put $20,000 down.

Now this changes, depending on how much you put down, let's say we have $40,000 to put down. We can actually now afford more because our loan amount is smaller. So in this instance, we can move that slider up to $265,000 because we put more money down.

Now let's try a scenario. Let's say we want to do 5% down. We have to kind of play around with these sliders a little bit on the Home Price field. So let's drag this to 5%. Let's see, $1,325. So 5% down is going to put us closer to the $230,000 range.

And what you could also look at too, is this is on a 30-year loan, so what if we changed this to a 15 year loan. On a 15 year loan, we can afford a lot less because that payment is higher because the term is shorter. So on a 15 year loan, with 5% down, we would actually only be able to afford closer to let me see here, readjust the down payment bout $155,000. So you can see that huge difference when you're going from $155,000, up to $235,000, just depending on going from a 15 year to a 30 year. So what you want to do is play around with this, so you can get a ballpark idea of what you're spending per month.

The nice thing about this mortgage calculator is it is going to put in not only your principal and interest, but it's going to estimate your property taxes, estimate your homeowners insurance, and estimate mortgage insurance. If you're putting less than 20% down, this should give you a really solid idea of how much you can afford, not only on $50,000, but you'll be able to calculate for yourself what your income is, what your debts are, and how much you can afford monthly and the max purchase price as well.

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Only for educational usage. All calculations should be verified independently. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This is not an offer to lend and should not be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate and/or financial advice. Read the full disclaimer here.