Do you really need a Mortgage Loan Officer, such as myself, to calculate for you how much home you can afford? No, you really don’t. I know you may be thinking, well what do I need you for then, Michael? Great question, well at the end of the day my job goes way beyond telling folks how much home they can afford, but I do think it is important to take some of the mystery out of home ownership and let you behind the veil, so to speak, on some important items so that you can feel comfortable with all parts of your potential home loan.
However, one of the best questions I am asked by my potential clients is “How much home can I afford?” There is a two part answer to this question, let me explain.
Part One – How much the lending guidelines say you can afford:
First off, there are guidelines for actually how much home you can afford and they center around what is called your “Debt To Income” ratio, or what we refer to as DTI. Debt To Income ratio is simply your monthly debt payments (housing payment, credit card payments, car payments, installment loan payments, revolving debt payments, etc) divided by your income. Simple math, if you have $4,300 in monthly debt payments and you have $10,000 in monthly income, then you would have a 43% DTI.
Many loan programs have a hard and fast 43% max allowed DTI due to the governments ruling on what they consider a “Qualified Mortgage“. However, there are many loan products like via the FHA and VA which allow you to go above and beyond this 43% DTI amount, which can come in handy in more higher priced areas (LA, San Fran, Denver, etc) when you are trying to qualify for a higher priced loan amount based on the current economic environment.
For instance currently I am originating a Jumbo FHA mortgage (a loan amount above $417K) with a client with a DTI of roughly 53%. In this case it is up to the Automated Underwriting System (AUS) and it’s interpretation of my clients particulars (income, job stability, credit score, assets, etc) which determine how high a client can go with their DTI before they will decline the loan.
Higher DTI levels can also come into play for first time home buyers just starting out with their first job and perhaps have quite a bit of student loan debt. Ultimately many first time home buyers and recent college graduates are working under the impression that over time their income will increase. So sometimes they are okay stretching their income thin in those first few years to get into a house while they wait for that next raise. They are already used to eating Ramen Noodles and drinking cheap beer anyway!
In most cases the specific loan program and the underwriting guidelines on your loan product will be a determining factor on how much home you can afford!
Part Two – How much do you actually WANT to afford:
One of the first questions I ask to all my potential clients during their initial mortgage consultation is, “How much do you want to spend on your house each month?” You would be surprised in the disconnect between what the banks guidelines say you can afford and what you are actually comfortable with. For example, holding true to our 43% DTI guideline if you had $10,000 in monthly income, and you have $1,000 a month in other debts (car payment, credit card payments, etc) then 43% of your income, means your TOTAL debt payments (including your house) would be $4,300 a month. That means that if you have $1,000 of other debts going out each month, then you can “afford” a $3,300 house payment ($1,000 in other debts – $4,300 in total debts allowed = $3,300 left over each month for housing payments).
Depending on where you live in the country $3,300 may be a very reasonable payment. In my neck of the woods, Kansas City, for a $3,300 house payment (Principal, Interest, Insurance and Taxes — otherwise known by it’s acronym PITI) you would be looking at somewhere in the neighborhood of a $600,000 loan amount. Should you be buying a $600,000-$700,000 home on a $10,000 a month income? Well that is up for you to decide ultimately. My point is just because the “guidelines” say you can afford it, can you REALLY afford it? Will you feel comfortable paying that much per month for a home? What is your take home pay after taxes? Do you want extra money left over each month to travel or save for retirement, etc? These are all items you need to take into consideration.
Exe. Debt To Income (DTI) Calculation
Ultimately you should know what you are comfortable paying each month. However, if you aren’t sure and you’d like have me run some calculations for you via an absolutely free of charge Mortgage Consultation just let me know. I am happy to spend time with you figuring out not only what the “guidelines” say you can afford, but in the end what you are most comfortable paying in housing each month. There really isn’t anything worse than being “house poor” after buying your new home. Yes, I’m sure you LOVE the house, but when you spend all your vacations at the house, all your “eating out” at the house and all your parties end up being you and your spouse sipping boxed wine out of a red solo cup at the house by yourselves because you can only afford to pay your house payment each month with nothing left over… well then you are “house poor” and that ain’t no fun!
PS, If it sounds like I can help you, please contact me directly through Linked In, email me at firstname.lastname@example.org or call/text me at 913-735-5363. If you’re not yet ready for a conversation, but you’d like to learn more about me and how I can help you or about the mortgage process in general, including great blog posts to send out to your clients, check out my website at http://www.michaelbakerhomeloans.com.