(NOTE: This method should not be used by stupid folks!!)
2.5 times your annual income!!!! Now that really was stupid-easy, wasn't it?
Now, we all know that IF you have cash to purchase a house, then nothing else matters. In fact, if you have cash, you can really buy ANY house you want for ANY amount of money. And, you probably don't need to read any further.
However, few people are in the fortunate position to pay cash for their home. MOST buyers will need to obtain a loan (referred to as a mortgage).
So, if your annual income is $100,000 then you can comfortably live within a budget if you purchase a house which is under $250,000. Of course, this is a over-simplified method. And, it is actually much more complex than this. Yet, this method gives us some numbers to work with. As a former loan officer, I learned to always have a way to describe a process which is easy for buyers to understand.
Let's look at some numbers:
- Annual Income of $100,000 = monthly amount of $8,333.
- Debt-To-Income Ratio (DTI). All of your debt per month should add up to less than 35% (ideally) of your monthly income which calculates to $2,917 ($8,333 x .35). Your debt is calculated by adding only the minium amount you are required to pay each month towards things such as mortgage ($1,667), car loans ($500), credit cards ($400), student loans ($350), personal loans, and child support. Do not include your telephone bills and those sorts of varying monthly expenses. Only include the types of debts which are found on a credit report. For this example $1,667 + $500 + $400 + $350 = $2,917.
- Please note that the DTI can be higher than the 35% shown above. It can go as high as 43% if you put more money down (have more cash). The lender is the one who will assist you with determining the best type of loan to fit your circumstances.
Based upon the fact that lenders consider a DTI of over 43% to be risky, this means that you may not get a mortgage loan if your DTI is higher than 43%.
For your ease of use:
Annual Income divided by 12 months = Monthly Income
Debt-To-Income Ratio (DTI) = Monthly Debt divided by Monthly Income
DISCLAIMER: This STUPID-EASY METHOD should be used as loose guidance only. Please ask me, Diana Faulkner, or another realtor for a recommendation of a lender so that you will know exactly how much house you can afford.
And, if you got this far in the article, you can actually use 2.5 to 3 times your annual income if you have low debt or lots of cash on hand and if the interest rates remain low (today's rate is 4.09%).
I will always point you back to a lender. Puh-leeeze, I beg of you, get pre-approved. This will make your life so much easier (you will thank me later). And, if you start the process early, it make the purchase of a home a lot less stressful.
For those of you who follow me, you already know what I am about to say: