How Much Money Can I Spend on a House?
The key principle to understand when determining how much money you can spend on a house is your debt-to-income ratio.
A mortgage banker who is letting you borrow money cares about how much of your total income is going to toward debt payoff, as your future housing payment will be included in this.
Just as you can include income from two jobs if you have two jobs, if you have multiple types of monthly debt payment, you include all of those, too.
The exact ratio varies from person to person and depends on your loan type (speak to a mortgage lender for details, email me if you’d like a recommendation) and other factors. However, 45% is generally in the ballpark, so let’s use that number for this example.
Monthly Debt ÷ Gross Monthly Income
this is your “Debt-to-Income Ratio”
Types of debt could include
car payments
student loans
child support
credit card debt
other home mortgages (if buying a second home)
Example:
$100,000 Annual Income
$8,333 Monthly Income
Debt to Income at 45% = $3,750 eligible for debt payments
Sample Debt Payments
Auto Payment - $600
Student Loans - $500
Credit Cards - $400
Total - $1,500
Remaining Debt Margin - $2,250/month ($3,750 minus $1,500)
This would mean you could afford to spend $2,250 on a monthly housing payment (includes: principal, interest, taxes, insurance, HOA).
This is the general idea of how the math works. To get the specifics about your situation that factor in loan type, credit score, downpayment, loan repayment terms, debt restructuring, family gift funds, etc., please speak to a mortgage lender.
Watch the video version of this article on Instagram (@LifeandLegacyProperties)
Do you have a real estate question I can help answer? Email me.
Kevin
P.S. If you have current real estate questions or are considering a move of your own this coming year, please let me know! I’d love to help.
