A common question asked by homebuyers is how much of my income should go for housing? The answer is not simple and ranges somewhere between 28% and 43% of your stable gross monthly income.
Do you have a budget?
Determining what you can afford for a housing payment shouldn’t necessarily be dictated by a %. If you have a budget then you should know what you can comfortably afford and most people who budget their money allocate less for housing than a lender might allow. If you don’t have a budget then click here to read more about budgeting.
Mortgage Guidelines and “Ratios”
Most mortgages are underwritten by automated underwriting systems before a human underwriter gives the final stamp of approval. The automated system tends to dictate the maximum housing payment that a person can get. Some programs like Rural Development (a zero down payment program) caps buyers off around 33% for a housing payment. Other programs like FHA (Federal Housing Administration) and even conventional loans are much more lenient and may allow a housing payment well over 43% of the gross monthly income. Things that affect the amount of housing a person can afford include credit score, credit profile, down payment, savings, and loan type. There is no single rule that applies to any individual. Seeking the advise of a loan officer to determine your maximum housing ratio is a good place to start.
The other piece that dictates the maximum housing payment is the maximum debt ratio.
Real Examples
Lets take two hypothetical borrower whose gross monthly income is $6000.
Borrower A has monthly debt of $1200 and Borrower B has monthly debt of $600.
FHA
FHA may allow up to 55% debt ratio. Income X 55% = max housing and debt
If the gross monthly income is $6000 then $6000 X 55% = $3300
Borrower A has monthly debt of $1200. If max housing and debt is $3300 then the difference may represent the maximum housing payment. $3300 – $1200 = $2100 max housing payment.
Borrower B has monthly debt of $600. If max housing and debt is $3300 then the difference may represent the maximum housing payment. $3300 – $600 = $2700 max housing payment.
Conventional Loan
A conventional loan may allow up to 50% debt ratio. Income X 50% = max housing and debt
If the gross monthly income is $6000 then $6000 X 50% = $3000
Borrower A has monthly debt of $1200. If max housing and debt is $3000 then the difference may represent the maximum housing payment. $3000 – $1200 = $1800 max housing payment.
Borrower B has monthly debt of $600. If max housing and debt is $3000 then the difference may represent the maximum housing payment. $3000 – $600 = $2400 max housing payment.
Equating a payment to a loan amount and/or sales price
Once you know your maximum housing payment, you can do the math backwards to determine the maximum loan and sales price. But try as you may, you won’t get a single right answer. Housing payments include 1/12th of the annual taxes, insurance, mortgage insurance, flood insurance and condo fee (as they apply). Housing payments are also affected by interest rates which vary by loan program and credit score. When you put these variables into the equation you get an answer; when you change the variables, the answer changes.
Too Much Math?
If you don’t like math, work with a loan officer who can help you determine your maximum housing payment and other loan terms! Call Renee today at 603-345-5644 or email: renee.duval@fairwaymc.com or click this link to complete an online application (no cost or obligation to you).
About the Author
Renee Duval – A Certified Mortgage Professional (CMP) with the NH Mortgage Bankers & Brokers Association (less than 50 loan officers are certified in NH). NMLS# 97937. Bookend LendingMortgage Company, NMLS#2289, is an Equal Housing Opportunity lender. The views expressed in this blog are those of the author, Renee Duval, and do not necessarily reflect those of her employer, colleagues or its clients. The information provided is for informational purposes only and is not intended as legal or tax advise. Programs are subject to change without notice and underwriting approval.