If there’s one bit of advice that any home buying expert could give you, it’s to never rush into purchasing a property. There’s no denying that the entire process can be as exciting as it is daunting, but doesn’t it make more sense to learn what to expect instead of diving in at the deep end?
Knowing just how much house you can afford on your income can make a huge amount of difference, and in this post, we’ll be taking a look at exactly that.
So, How Much House Can You Afford to Buy?
The only way to really know this is by taking your average annual income and then calculating 28% of the amount. This isn’t a ball park figure either; in fact, it’s the exact percentage that experts recommend you get to grips with. So, let’s imagine that between you and your partner, you bring in $75,000.
That works out to about $6,250 per calendar month between the two of you (or less if you’re planning on applying alone). 28% of that total is $1,750, so ideally, you’d want your maximum monthly mortgage repayment to be up to, but not over, $1,750.
What Else Should You Consider?
The next number to consider is 32, or 32% to be more specific. Your total housing payment, including your homeowner’s insurance and any other types of fees relating to your property, should not amount to more than 32% of your monthly income. This calculation includes your mortgage, so if we consider the aforementioned example, this would mean that:
28% is $1,750 per month, with an additional 4% to total $2,000. So, with your monthly mortgage repayments and your total housing payment, you’re looking at needing $2,000 a month set aside based on an income of $6,250 per month.
The final aspect to consider is that you’ll also likely have monthly debt repayments relating to any loans that you might have taken out previously. Although not game-changing, these debts can certainly take a toll, and you’ll definitely want to factor them in when preparing for a mortgage application. This is known as the rule of 40, or 40%.
This additional 8% of your total monthly income will bring the above example to $2,500 in money owed each month on average, leaving you as a borrower with an estimated $4,250 to comfortably enjoy your lifestyle.
How Can You Work Out How Much House You Can Afford to Buy?
It’s fairly simple really, first of all you’ll need to take what you have set aside as your mortgage amount. Using the above example, this amount is $1,750, which you’d then divide by $650 (the number leading experts calculate as the cost per $100,000 borrowed), and then you’d multiple that sum by $100,000 as follows:
‘$1,750 divided by $650 multiplied by $100,000’ (equalling $269,230). Simply switch the first number ($1,750) and you’ll be given the total sum that you could comfortably afford to borrow.