How Much House Can I Afford? Quick Guide To Home Affordability

By Richard Stevens
Digital Content Manager
New Silver Lending, LLC

Calculating how much house you can afford is relatively straightforward if you just want a basic estimate based on your current salary. For instance, one quick rule thumb is to multiply your annual salary by 2.5 (or 3 if you have a good credit score). With that being said, you can also achieve a more accurate estimate, using some simple debt-to-income ratios.

The goal of this post is to outline the debt-to-income ratios that most US banks use when calculating your recommended mortgage amount. We will be using several user-friendly charts and examples to help solidify a few key points.

Table of Contents

  1. Quick Rule Of Thumb: Multiply Your Annual Salary By 2.5 or 3
  2. The More Accurate Method: Using The 28/36 Rule
  3. Can You Break The 28/36 Rule?
  4. What Is Debt-To-Income Ratio?
  5. How To Calculate Debt To income Ratio
  6. Debt-To-Income Ratio Example
  7. 5 Tips For Getting A Better Interest rate
  8. Final Thoughts
  9. Frequently Asked Questions (FAQ)

Quick Rule Of Thumb: Multiply Your Annual Salary By 2.5 or 3

The quickest way to work out how much house you can afford is to multiply your annual pre-tax salary by 2.5 or 3. If you want a conservative estimate, use 2.5. If you want a more aggressive estimate, use 3. You can see how simple this is to do by taking a quick look at the table below.

Quick Rule Of Thumb How Much House Can I Afford

Using this simple method allows you to quickly work out a potential mortgage amount based on your current salary. Naturally other factors will influence the final bond amount, but this is the place to start if you’re still just browsing for houses.

Also, it’s worth mentioning that the recent drop in interest rates (due in part to Covid-19), means that multiplying by 3 (and even higher multiples) is now more realistic for American’s with a stable income.

The More Accurate Method: Using The 28/36 Rule

The 28/36 debt-to-income rule is effectively the default recommendation that most banks in America support. According to the 28/36 rule:

28% – Your mortgage repayment should not exceed 28% of your monthly pre-tax salary

36% – Your total debt obligations should not exceed 36% of your monthly pre-tax salary

Again, this is easier to demonstrate with a table, so you can get a feel for what certain salary brackets can afford.

Please note, the table above assumes a 5% deposit on the house. Also, you might find that your total debt (mortgage + other debts) is much higher than the table suggests. If that is the case, it will reduce how much house you can afford and your monthly mortgage repayment.

The team from Smart Asset has summarized the 28/36 rule quite nicely. In essence “for every pre-tax dollar you earn each month, you should dedicate no more than 36 cents to paying off your mortgage, student loans, credit card debt, and so on.”

Can You Break The 28/36 Rule?

While the 28/36 rule is a reliable guideline, it is not an immutable law that banks are obliged to follow. It’s convenient to think of the 28/36 total debt rule as the starting point on a sliding scale.

If you have a poor credit score and lots of existing debt, banks might view you as a high-risk individual and grant you a bond that is less than 28% of your pre-tax salary.

Conversely, if you have no car repayment, low student debt, and a good credit score, you could definitely qualify for a mortgage that is more than 28% of your pre-tax salary.

Factors which can decrease your maximum mortgage

  • Large car repayment
  • High student loan debt
  • High credit card debt
  • Low income
  • Poor Credit Score

Factors which can increase your maximum mortgage

  • Small or no car repayment
  • Manageable student loan
  • Little to no credit card debt
  • High Income
  • Good Credit Score

What Is Debt-To-Income Ratio?

Debt-to-income (DTI) ratio is the percentage of your pre-tax income that is allocated to paying off debt. Debt-to-income is the basis of the 28/36 rule and it is the primary determinant of how much house you can afford, based on your existing income.

As mentioned earlier, other variables like credit history affect your maximum mortgage amount, but your individual DTI ratio is definitely the most important element in the equation.

How To Calculate Debt To income Ratio

Debt-To-Income (DTI) = Debt / Income * 100

Debt-To-Income Ratio Example

To further illustrate this formula in action, let’s use an example of someone who earns $5,000 per month, and has total debts of $1,800.

  • Monthly Debt: $1,800
  • Monthly Income: $5,000
  • DTI = Debt/Income * 100
  • DTI = $1,800/$5,000 * 100
  • DTI = 36%

It’s clear to see that in the example above, the individual has a DTI of 36%. This is perfectly inline within the recommended range. Also, you can work out your DTI using monthly amounts, or annual amounts.

5 Tips For Getting A Better Interest rate

If you want to save yourself a huge amount of money before you decide to invest in a house, improving your credit score is arguably the most effective way to do so. This is because your credit score will impact the interest rate that a bank is willing to offer you.

On the surface, this might not seem like a big deal, but when you factor in 30 years of compounding (the standard length of a home loan in the US), the difference quite literally becomes exponential.

1. Always Pay Your Bills On Time

It might not seem like such a big deal, but missing a single payment can negatively affect your credit score. The underlying concern is your financial reliability. From a financial perspective, people who miss payments often are less reliable than people who never miss payments.

Credit score companies use this data to calculate your final number, be it good or bad. If this is something that affects you, it could be wise to start an emergency fund in order to prevent late payments in the future.

2. Never Max Out Your Credit Card

Maxing out your credit card is a big red flag for potential lenders. Your credit utilization is the second most important factor in the credit score calculation, so it is in your best interest to stay well within your limits when using credit.

To be more specific, aim to use 30% or less of your maximum credit allowance. By following this guideline, you can quite literally increase your credit score over time.

3. Start Building Your Credit Profile As Soon As Possible

One of the biggest issues that many Americans run into when applying for a first time home loan is a ‘thin credit profile’.

According to Investopedia, there are approximately 62 million US citizens that have this very problem. The challenge for people with a thin credit profile is that credit score companies don’t have enough data points to generate an accurate score.

Fortunately, there are ways to combat this, namely:

Use Experian Boost or UltraFico – These services factor in non-credit variables like banking history and utility payments to start building your credit score.

Use Your Rent Payments To Build Your Credit Score – Companies like Rental Kharma and RentTrack are designed to help you do this. Provided you pay your rent on time, you can start building a positive credit history, even if you don’t have a credit card or utility payments.

4. Make Lump-Sum Payments Toward Your Car Or Student Loan Debt

As mentioned earlier in the article, your debt-to-income ratio is the most important factor in how much house you can afford. Based on this, it makes perfect sense to clear as much of your existing debt as possible, before you apply for a home loan.

Paying off existing debt can increase the percentage of your total debt that is allocated to your home loan, and it can also improve the interest rate that a bank is willing to offer you.

5. Save For A Big Deposit On The House

Saving for a large deposit is one of the best things you can do when trying to buy a home. By putting money away for a big deposit you can:

  • Increase the maximum mortgage amount that banks are willing to offer you
  • Decrease the interest rate that you pay for the duration of the loan
  • Decrease your monthly repayment and increase your monthly cash flow

All of the benefits listed above will have a favorable effect on your financial well-being over the short term and the long term. In other words, putting down a big deposit is one of the best things you can do, provided you have the discipline and financial means to do it.

Final Thoughts

In the end how much house you can afford is primarily dependent on your debt-to-income ratio and your financial track record. Fortunately, by practicing good financial habits, you can improve both of these attributes over time.

Furthermore, interest rates in the US have dipped to some of the lowest levels in over 20 years in response to the Covid-19 pandemic. This is good news for aspiring home owners, because you can potentially buy a more expensive home, knowing that your monthly repayment will be manageable due to the lower interest rate.

Lastly, it can also be helpful to run your salary and debt figures through a home affordability calculator. This can help give you an even more detailed understanding of your potential mortgage amount.

Frequently Asked Questions (FAQ)

How much house can I afford with 40,000 a year?

With a $40,000 annual salary, you should be able to afford a home that is between $100,000 and $160,000. The final amount that a bank is willing to offer will depend on your financial history and current credit score.

How much house can I afford if I make 100,000 a year?

With a $100,000 annual salary, you should be able to purchase a home between $250,000 & $400,000. Again, this will depend on your credit score and your existing debt obligations. For instance, if you have a big car repayment, this could decrease your maximum mortgage amount.

Conversely, if you have no car repayment, you could potentially qualify for an even bigger loan.

Do you have to make a down payment?

There may be some financial institutions that don’t allow a down payment, but most banks will require you to put down a payment of at least 3%. Ideally, you should aim for a down payment that is 20% or more of the property value. Naturally, this might not always be possible, but it is a good target to aim for.

How much can I afford on a house based on my salary?

As mentioned at the beginning of the article, the quickest way to estimate how much house you can afford based on your salary is to simply multiply your annual salary by 2.5 (or 3 if you have a good credit score).

Alternatively, you can multiply your monthly pre-tax salary by 0.28, to quickly estimate a guideline mortgage repayment.

What if your income level is inconsistent?

If you are a freelancer with an inconsistent income, it could negatively affect the total mortgage that lenders are willing to give you. Having said that, if your annual income as a freelancer is relatively stable, it stands to reason that banks will consider your income over multiple years when determining your potential mortgage amount.

How much do I need to make to afford a 250k house?

To afford a $250k house, you will need to earn between $5,000 and $7,000 per month, assuming your existing debts are under control and you have a good credit score.

How does your credit score affect how much house you can afford?

Simply put, the better your credit score, the higher your maximum mortgage will be. A good credit score can also help you agree to a lower interest rate with the bank. Over a period of 30 years, a reduced interest rate can save you a huge amount of money.


Posted on August 17, 2020 at 4:33 pm
Paul Burrowes | Posted in Uncategorized |

How to Navigate Moving and Downsizing as a Senior

Image via Pexels

by Michael Longsdon

Moving to a new home is an exciting, yet daunting task. Not only do you have to decide where to live, you also need to think about the logistics of moving. Because most seniors choose to move into smaller homes or units, downsizing possessions might also be on your mind. Below, learn how to choose the best home for your golden years and find tips for moving and letting go of items.

Independent Living Options

When you think of housing options for seniors, the first thing that comes to mind might be assisted living facilities and nursing homes. However, there are actually numerous options that let you live independently.

First, you can simply buy a smaller house that is easier to take care of. This allows you to pick a new city or neighborhood that fits your lifestyle better. By knowing which recreational activities and amenities you want close by, you can narrow your search.

The local housing market might also influence your choice. For example, over the past month, homes in Scotts Valley spent an average of 38 days on the market and sold for an average of $933K. In a competitive market like this, you’ll need to plan and budget accordingly.

In addition to single-family homes and condos in residential areas, you can also weigh the benefits of moving to a retirement community. These places are not like nursing homes. On the contrary, independent living campuses and age-restricted communities have separate living units and come with extra amenities that you wouldn’t get from a regular condo or apartment.

Assisted Living Options

Your health conditions and physical needs will ultimately determine what type of living arrangements are best for you. If you need help with daily tasks, assisted living may be a good fit. Keep in mind that each facility is unique, so it’s important to do your research to find one that’s right for you.

If you don’t need assistance now, but anticipate that you will in the future, a continuing care retirement community (CCRC) might be a better match. These communities provide every level of care, allowing you to transition to a higher level if needed.

There is also the option of remaining in your own home and hiring a personal care aide or homemaker. With in-home care, you can remain independent while still getting the help you need.

With COVID-19 concerns being a major source of anxiety for many older people, there is comfort in the idea of remaining at home rather than moving to a communal setting where infections could spread more easily. Whether you choose independent living, in-home care, or assisted living, make sure you stay up-to-date with the latest guidance from the CDC.

Planning Your Move

No matter where you decide to move next, you’ll have to figure out some logistics. It’s important to plan your move as far in advance as possible so you can choose a good moving company, pack your belongings, and tackle the usually dreaded task of decluttering.

Because movers can book up quickly, it’s a good idea to contact a company as soon as possible to ensure you can stay on schedule. To find a moving company, you’ll want to do some research online. Reading mover reviews can provide a lot of insight and help you pick the best service for you.

Even though professional movers can pack on your behalf, you might be more comfortable boxing up things yourself. There are many ways to streamline the packing process so it’s not stressful. For example, Consumer Affairs recommends packing up each room completely before moving onto the next room.

Decluttering will also help tremendously during the moving process. Not only will there be less stuff to pack up, you will also have an easier time fitting everything into your new home.

Moving to your new place can be emotional and stressful, but the move will also come with many new opportunities. By doing your research to find the perfect type of housing and planning your move out step by step, you can ease into your new life with less stress and focus on your new possibilities.

 


Posted on May 15, 2020 at 12:29 am
Paul Burrowes | Posted in Uncategorized |

Moving to Assisted Living and Leaving the Family Home

When assisted living is on the horizon, there’s one question that looms: What should seniors do with the family home? Most of us dream of passing our homes to our children someday. But in the face of rising assisted living costs, many seniors are realizing that’s no longer an option. If you’re headed to assisted living and wondering the best way to handle your home, this guide can help.

The High Cost of Assisted Living

Nationally, assisted living prices average $4,027 a month for a studio apartment, with higher rates for one- and two-bedroom units. That’s approximately what the average retiree earns in a year before taxes, and seniors living on Social Security alone get by on much less. With these numbers, it’s not hard to see why so many seniors consider selling their homes to pay for assisted living.

Selling a Home to Pay for Assisted Living

Selling a home can be a smart way to afford assisted living. However, it’s important to do the math first to determine if the proceeds of a home sale can reasonably cover assisted living fees.

Assisted living facilities vary in price, and some cost more than the national average. However, seniors on a budget can still find a facility thanks to the wide range of assisted living options. Since pricing depends heavily on individual needs, it’s best to set up tours of facilities to get an accurate estimate of what you’ll spend on assisted living.

Once you understand what assisted living will cost, compare it to home prices in your area. Homes in Scotts Valley sell for an average of $925,000, following an upward trend as the community’s housing market grows more competitive. That could make it a good time to cash in on your investment, but in order to understand exactly how much you could net from selling, you’ll need to do a comparative market analysis to determine what your home is worth. For a basic CMA, look for recently-sold listings in neighborhoods like yours, and choose properties similar in size and condition to your own. This will give you a rough idea of your home’s market value before talking to a realtor.

Renting: An Alternative to Selling?

With the exception of continuing care retirement communities, most assisted living facilities don’t require an upfront lump-sum payment. Rather, payments are made in the form of monthly “rent.” That opens another option for tapping into your home to pay for assisted living: renting.

Two-bedroom units in Virginia Beach rent for around $1,300 a month on average. While that’s not enough to pay assisted living costs in full, it could supplement income enough to make it affordable. That’s especially true if your mortgage is paid off or close to it. Keep in mind, however, that living in assisted living means you’ll need to hire someone to manage your property. Expect to pay around 10% of the property’s rental income toward property management. On the upside, capable property management can increase your unit’s marketability and reduce vacancy rates.

When Keeping the House Makes Sense

For some seniors, the cost of assisted living doesn’t necessitate major financial adjustments. Rather, they’re looking for a way to keep their home in good shape until it’s time to pass it on. While it’s possible to bequeath a home while living, your loved ones will receive more favorable tax treatment if they receive it as an inheritance.

Again, renting may be a wise option. Vacant homes are prone to decay and vandalism, and renting ensures the property is maintained and generates income to cover ongoing expenses. You may also choose to rent the property to family below market rate, although giving loved ones a break on rent has tax implications.

For most middle-class seniors, paying for assisted living means making major changes. However, it doesn’t necessarily have to mean selling the house. If you’re determined to keep the house in the family, try renting it out while you move to assisted living. But if you’d prefer your old house taken off your hands, get in touch about selling your property for a great price.

by Andrea Needham

andrea@eldersday.org

Image via Unsplash


Posted on April 23, 2020 at 11:46 pm
Paul Burrowes | Posted in Uncategorized |

Downsizing 101 for Seniors

(Photo viaPixabay)

You’ve decided to downsize. Congratulations! Whether you are downsizinginto a completely new home, decluttering your current humble abode, or downsizing an area of your life completely unrelated to real estate such as finances, this is a chance to start a whole new chapter in your life that many report to be marvelously liberating. It doesn’t take much to start the process, but it can be overwhelming. The key is in the planning so that you are able to enjoy your golden years to the fullest.

Finding Your New Home

Before you take the plunge and pick out your new home, be sure to do your research into whether your retirement savings will fund your downsizing, or if you’ll need to find additional sources of financial support, even outside of a mortgage. It’s exciting to house hunt, but it’s important to make sure you’re only looking for places within your budget! When it comes to shopping for a mortgage, a worthwhile option to look into is a conventional loan if you’re still working. By taking out this type of loan, you can avoid having to pay for mortgage insurance. However, you will need proof of income and good credit (generally a credit score above 620).

Your current house made sense for you when you bought it, but now it’s time to find a home that makes sense for you today.Make a list of what works for you in your current home, what doesn’t work, and how you’d like to see yourself living in the future, whether that’s closer to your grandchildren or living in a warmer climate.

If mobility is an issue, you’ll only want to focus on single-story homes.If you’d love to say goodbye to mowing the lawn but don’t like condo or apartment living, you may want to consider a patio home. These are detached or semi-detached homes that often have amenities like pools and tennis courts, and outside maintenance is typically provided. Consider that down the road, you may prefer walking to your nearest store or doctor’s office rather than driving 20 miles.
If you’re thinking of moving to a new town, spend a few nights there first. It’s better to get a feel for where you might be living before taking the plunge.

What to Do with a Lifetime of Stuff

You can downsize your home without actually moving. It’s what is referred to as de-cluttering. You’ve collected a lot of stuff over the years, but purging and getting organized can create a calming environment, not to mention free up space so you don’t have to have a junk room. Sorting through all your belongings is hard, both physically and emotionally. Here are some tips from professional organizer Sara Getzkin, who has appeared on TLC’s “Hoarding: Buried Alive:”

  • Don’t try to tackle too much at once. Getzkin tells her clients, “Let’s carve out three hours and see what we get done. Then, you are going to rest and not even think about this.”
  • Prepare three bags or boxes and label them “Keep,” “Toss,” and “Sell/Donate.”Put away what’s in your “Keep” pile at the end of the day and throw out what’s in your “Toss” pile.

What about all the nostalgic items, like your children’s art projects or report cards? Psychology Today suggests photographing them. By taking pictures of them, you can still have them on hand. Once you’ve taken the photos, add them to your computer in a folder called “Nostalgia.”

Take Control of Your Finances

Retirement is the big goal we are all saving up and planning for. Whether you are getting close or have already retired, this doesn’t mean your financial planning should cease entirely. Financial security is a lifetime goal, and one you will need to work at even during your golden years. Take a look at how much you have saved up and determine how much you can withdraw each year without using it up completely. Now is the time when you are free to travel and try out new hobbies, but don’t forget that you may need some extra funds set aside for future medical bills, home renovations to age in place, or assisted living. With all that free time, maybe you could explore a side gig such as woodworking or painting to make some extra cash to ease your mind and fund the fun times. If you haven’t done so already, partner up with a financial advisor who can offer you an objective opinion and expert tips on navigating your senior years. A second set of eyes can prevent you from making a costly, irreversible mistake.

Following these tips will help your downsizing feel like a step up. With some extra planning, you can successfully downsize your home, items, and/or finances with ease. Then, you can truly enjoy your golden years, minus the unnecessary stress.

Guest Post by Michael Lonsdon


Posted on June 14, 2019 at 6:07 pm
Paul Burrowes | Posted in Uncategorized | Tagged ,

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