Are you considering buying a house this year but wonder how much you can afford? In this video, we’re going to share a case study of how we addressed this question for one of our clients. We’ll chat with local realtor Gabe Martin to learn about debt to income ratio and how it helps us figure out the right housing budget for you.
Understanding Debt To Income Ratio
Our clients came to us making $100,000 a year—a nice budget for finding a house. This couple and their children did have generous salaries, but only wanted to spend $2,700 a month on their housing budget. They were already paying $2,500 to rent in Denver, and the smaller bump in funds was all they wanted to pay.
To help them better understand their monthly payment, we need to analyze their debt to income ratio. From a lender’s perspective, this is a very large number that often supersedes what a consumer actually wants to spend. For example, our clients made $100,000 a year. Divide that by 12 and that adds up to $8,333 a month. This is what is called gross income, not net income. Net income is what you bring home after taxes.Verify your mortgage eligibility (May 6th, 2021)
This means that the bank will approve you for a number that far exceeds what you might have your debt obligations for. On our clients’ credit report, they had roughly $830 or so worth of debt spread across student loans, credit cards, and car payments. 45% of their gross monthly income of $8,333 is $3,750. That’s the actual number that, spread across all of their debts, forecasts, and housing payment for this property, that a bank would actually approve them for.
Keep in mind that we have to take that number and subtract their $830. This leaves a little bit over $2,900 left on their debt to income calculation.
Finding The Right Sales Price
Your monthly housing budget is part of one being approved. By doing the calculations and seeing what you’re comfortable with spending, you’ll know which sales price not to exceed. Remember, if you buy a house for $550,000 or $600,000, at some point in time that’s going to be paid back.Verify your mortgage eligibility (May 6th, 2021)
Gabe was good enough to find a house for our clients at $550,000. They got under contract, put down 10% at $55,000, and had a loan amount of $495,000. Their principal and interest payment of that loan was $2,020. The taxes for the property were $395. They had homeowners insurance of $125. And because they did not put 20% down, they had mortgage insurance of $66. In total, their housing payment came out to $2,606, well below the $2,700 they were willing to spend.
How Much Can You Afford?
When it comes to how much house you can afford, it’s really a bunch of numbers and calculations. Ultimately, however, it’s going to come down to you as a borrower and what you’re really comfortable spending. It’s our job as the lender to get you approved for that amount. As your realtor, it’s to find you the house that you love and keep you within your budget.
Sometimes out in the field, you’re going to get super excited and you might want to exceed the limits of your purchase price. However, you don’t want to do this. It’s our role to rein you in and, if we can stick between your housing budget that you forecast mentally and keep that debt to income ratio in the approvable findings, it is okay to increase or decrease your purchase price budget accordingly.
If you’re not good with calculators and you don’t want to get your scratch paper all messed up, feel free to use our worksheets and mortgage calculators to help you. We also have a homebuyer’s course and plenty of videos that will help you in the home buying experience. And don’t forget to subscribe to our channel so you never miss an episode all about Denver real estate education!Show me today's rates (May 6th, 2021)