How Much House Can I Afford?
How Much House Can I Afford?
Buying a house can be such a daunting task. You found one you love, or maybe haven’t even started looking because you want to know how much house you can afford. As a mortgage professional, I never want you to be considered “house poor,” meaning that your mortgage payment is so high that you put most of your money into your house, and don’t have time for the rest. Another place I never want you to be is wishing you hadn’t paid as much as you did for a house.
Too long, didn’t read: there is a basic guideline that lenders follow to determine if you are eligible for a home, but there is no one size fits all policy. The best way to determine your eligibility is to speak with your local mortgage professionals at Stockton Mortgage.
Thanks to poor lending practices in the early 2000’s, there have been numerous guidelines put in place that will mostly help you avoid this. One of the biggest factors involved in determining how much house you can afford is whether these guidelines say you can. I hear quite often from people, “If I can afford $1200 in rent, I should be able to afford a $1200 mortgage,” and I cannot agree with you more. One thing to keep in mind that doesn’t have to deal with the lending side is that when you are buying a home, you are going to be the one responsible for maintenance, repair, and general upkeep of the home.
Regarding the lending world, we have guidelines that follow a basic debt-to-income ratio to determine how much house you can afford. These are a general guideline, and I will go into more detail afterwards to show you how we can go higher. There are also 2 calculations we look at which is your housing ratio vs. your total ratio. Your housing ratio is strictly your principal and interest payment, plus your taxes, insurance, mortgage insurance and HOA fees, if applicable.
How do we calculate your debt-to-income ratios? Honestly, we have a system that does the majority of the work for us, but it is pretty easy to do it ourselves. Here is the math that we use to determine what your debt-to-income ratio, or your DTI, will be:
Monthly Housing Payment* / Gross Monthly Income = Housing DTI Ratio
*Your monthly housing payment includes principal and interest, taxes, insurance, PMI and HOA dues if applicable.
Total Monthly Debt* / Gross Monthly Income = Total DTI Ratio
*Your total monthly debt includes anything listed on your credit report such as auto loans, student loans, installment loans (boat, RV, ORV, etc.), child support payments, and more. Collections accounts and medical collections can be removed under certain circumstances.
Every loan type has different standards of qualification when calculating your DTI. They are as follows:
Conventional: 28% housing / 36% total
FHA: 31% housing / 43% total
USDA: 29% housing / 41% total
VA: 41% total (the VA is mostly worried about your total debt-to-income ratio)
Now, these may seem really low and daunting to you, and you wonder, with the housing market today, if you would truly qualify for a mortgage. The answer is you may be surprised. The above listed ratios are the general guidelines, but they are not the maximum allowable limits when trying to get approved for a mortgage! Here are the maximum allowable ratios for each of the above listed loan types:
Conventional: up to 45% total debt-to-income is more common, however you can qualify up to 50% with strong compensating factors, such as a high credit score or a lot of cash in reserves (money in your bank account, 401k, etc.)
FHA: up to 40% housing / 50% total debt-to-income is the most common, and more favorable for first time homebuyers. There are times, similar to a conventional loan, that you can have a higher ratio with strong compensating factors, but it is less common. However, it is possible to receive an automated approval over 55% DTI!
USDA: 34% housing / 46% total. USDA is a little more strict on their underwriting procedures, as I have mentioned before. To receive the higher debt-to-income ratios, the USDA does require a number of the compensating factors such as time on job, credit score, length of time for on-time payments for other accounts, and others that can help bolster your ranking.
VA: up to 55% total, with compensating factors. A lot of what the VA looks at is your residual income, which is the amount of money you have left over from paying your major bills, including estimated utility costs. These are not specifically calculated by your lender, but they are considered through the AUS findings, or the automated underwriting system’s findings. The VA considers the number of household members you have in the qualification process, as they do not want to put unneeded strain on those that have served their country.
None of these ratios truly take into account some of the other expenses that owning a home can have. Furnaces go out, appliances need updating, the lawn needs mowing, the roof needs replacing. Some of these can be expected, others can be surprises. There are multiple resources out there that can walk you through this to help you prepare for the unexpected. Many lenders will require you as a first time homebuyer to take one of these courses just so you are comfortable and have the knowledge going into being a homebuyer, and have the power to succeed. Fannie Mae has a free certification called the HomeView course, which can be taken here: Fannie Mae HomeView. It goes over knowing when you are ready, saving for homeownership, understanding the loan process, and much much more.
As you can see, there is no “one size fits all” for mortgages. The goal is to keep you living comfortably, staying within your affordable boundaries, and getting you on the path to living the American Dream. We at Stockton Mortgage are here to help, and there is a reason we are called mortgage professionals: we are not only here to help you with all of the unique ins and outs of the industry, we are here to serve you. Don’t sell yourself short and assume that you can’t afford a home. Call us today to get on the right path!