How Much Income For Mortgage?
Before you jump into the hot housing market, you should know how much of your income for mortgage. This will help you understand how much of your income is left over for other expenses.
The 28/36 Rule
A Crucial Figure for Homebuyers The 28/36 rule is one method for determining how much of your income should go toward your mortgage. This rule states that your mortgage payment should not exceed 28 percent of your monthly pre-tax income and 36 percent of your total debt.
The debt-to-income (DTI) ratio is another term for this. A Helpful Hint: Only count your reliable income when calculating your 28/36 rule, not your potential income growth, overtime money, or side hustle income.
This metric is important for budgeting your home affordability and serves as a good indicator of financial health. It informs the lender about how much debt a borrower can reasonably take on. “A household is said to be cost-burdened when housing costs exceed 30 percent of income,” Glynn explains.
According to Jonathan Gassman, CEO, and founder of The Gassman Financial Group, a New York City-based public accounting firm, lenders don’t want to be stuck with a foreclosed home because the borrowers couldn’t pay their mortgage. “They want some wiggle room in terms of affordability.” According to Gassman, financial lenders will perform the same calculations before deciding to lend to you. The front-end ratio is 28%.
The 28 percent figure is also known as the “front-end ratio.” It is calculated by dividing the total cost of housing by your total monthly income. Housing costs include mortgage loan payments, interest, property taxes, insurance, and HOA fees, but not utilities. Divide the total monthly housing cost ($1,300) by the total monthly income ($4,700) to get the front-end ratio of 27.65 percent. The back-end ratio of 36% The back-end ratio, also known as the debt-to-income ratio, is the second half of the rule.
This is calculated by dividing your total monthly debt by your monthly income. According to the 28/36 rule, lenders prefer a backend ratio of less than 36 percent. The back-end ratio adds housing costs to existing debts such as car loans, credit cards, school loans, personal loans, and so on. If you pay $1,300 for housing, add all of your other debts and divide them by your monthly income to calculate your back-end ratio.
Divide total debt ($1,750) by income ($4,700) to obtain the back-end ratio of 37.23 percent. Based on this example, the front-end ratio is 27.65 percent, or slightly less than 28 percent. And the back-end ratio is 37.23 percent, which is slightly higher than 36 percent. Costs can quickly add up. Data obtained from a real estate website:
Clever estimates that, excluding their mortgage, the average homeowner spends more than $13,000 per year on their homes. As an example, According to HomeAdvisor, there are several large-ticket items that homebuyers should factor into their budgets, especially for older properties.
According to Daniel Goldstein, an agent with Keller Williams Capital Properties in Bethesda, Maryland, these additional costs can be shocking for first-time homeowners. Some homeowners will be surprised to discover they need a new lawnmower, as well as a new washer and dryer because they did not realize they did not come with the house, according to Goldstein.
Purchase What You Can Afford.
Indeed, given the tight inventory, there are numerous temptations for borrowers to overspend on a home, which some borrowers may find difficult to ignore. “Don’t expect income growth to help you grow into that payment and get used to it,” Goldstein advised. “If you’re expecting a $500-a-week extra income from a side job or overtime and it doesn’t materialize, you’re in big trouble.” “When it comes to your appetite for borrowing, don’t go in with your eyes bigger than your stomach,” says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling (NFCC).
The larger the home and the loan, the higher the commission paid to a realtor or mortgage broker. “It’s fantastic if you get approved for something that is more than 28 percent of your monthly income,” McClary says. “Someone might try to convince you that you can still afford that.” That is why McClary recommends that consumers contact a HUD-approved housing counselor.
They are sponsored by the United States Department of Housing and Urban Development (HUD) and will provide free home buying advice as well as a reality check you may require. (From NextAdvisor with TIME, 2021, How Much Income Should Go to Your Mortgage)
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