Do I Make Enough Money to Buy A House

You think that you can't afford a home but what if I told you that the number that you need might be lower than you think? Today I'm going to break down exactly how much income that you need to buy a house and why most people are actually asking the wrong question. Plus I'm going to give you a super simple formula to estimate how much house you can actually afford and I'm going to say that you've got to stay till the end but I'm going to give you this bonus so it's super easy to figure out. And later in the video I'm going to talk about a trick that even first-time buyers don't usually know that could mean the difference between a yes or a no with a lender's pre-approval. Okay here's what most people don't know or realize. It's not necessarily about how much money you make but it's about how much money you're spending. This is where what we call debt to income ratio comes into play. It's a simple formula. Your monthly debts like car payment, student loans, credit card payments and any other credit that's on your credit report divided by your gross monthly income. That's gross before taxes. Most lenders want this number to be 45% or lower. There are some exceptions to get a little higher which I'll go over but 45% is a good conservative number. So just to repeat this includes your total debt to income ratio is going to include your new mortgage payment including the prorated taxes, property tax, homeowners insurance, any HOA association fees if there are any, any credit card monthly payments, minimum car payments, student loan payments, those kinds of things. It does not include utilities, you know house expenses, cable. It doesn't include those things. It includes what's on your credit report and the mortgage payment. If you are divorced and pay child support or alimony it does include that expense as well. So two people making the same exact income could qualify for a very different house price and I'm going to tell you how. Let's say you make $75,000 a year gross. That's monthly $6,250. If you times that by 45% that means you could have total debt including the house payment of $2,812. Now let's say that you have a $500 a month car payment and $300 a month in minimum payments on your credit cards. So that's $800 a month in obligations. We subtract that $800 from $2,812 and we now see that you could afford a house payment of $2,012. So what kind of a home does $2,000 a month get you? So let's say that interest rates were around 6.5%. In today's market that could get you a house from anywhere from $200,000 to $280,000 depending on what part of the country you live. The reason? Property taxes and property insurance are different all over the country. Now in Texas where I live property taxes and property insurance are actually on the high side. So in Texas that could get you about a $220,000 house. Somewhere else it might be $280,000 because they might have lower tax and lower insurance. Now I do want to make a quick side note. I'm running these calculations and estimations based on you making a minimum monthly payment. Now if you're putting down 20% or you're putting down a $1,000, it might not necessarily be applicable to you. I'm just trying to make a generalization. And in just a second I'm going to walk through a quick tool that you can use to plug in your own numbers. So stay with me. So the loan type also affects how much money you need. That's because different loan types actually allow you to have higher or lower debt. So stay with me we're going to go over that right now. FHA loans, Federal Housing Administration, are actually the mothership of all loans when you've got some high debt. They will allow you in most cases to go up to 55% of your income in debt. So the example we used a little while ago was 45%. So imagine being able to have 10% more debt monthly on that $6,250 salary. 10% more means you can have $625 monthly more in debt than you could with a different kind of a loan. If you're trying to really max out your property type or get into a neighborhood where the houses might be a little higher, this could be a really good loan for you. FHA loans are actually 3.5% down no matter if you're a first-time home buyer or not. So FHA loans can offer a low down payment solution and allow you to have a higher debt to income ratio than other types of loans. Conventional loans are another type of popular loan that most people are either FHA or conventional. Conventional loans are the ones that are more strict. And we used that example before of 45% debt to income. There are some exceptions. If you put a large down payment, you can go up to 50%. But for this example, I'm going to stay with me at 45%. Now conventional loans, you can put as a first-time buyer, you can put 3% down. Everybody else, if you're a second, third, fourth-time buyer, you have to put 5% down. Again, you can always put more down if you want to. I'm just talking about the minimums. So other loans, VA loans for our veterans, these are also another type of government loan. We've got to help our veterans. 0% down, no PMI, and very lenient on things like income, lenient on debt to income ratio. Normally it's 55%. I actually recently got someone closed that was at a 67% debt to income. Now, granted, they had a lot of savings after closing, but just so you know, VA is very flexible. So if you're a veteran watching this, the last type of loan I'll go over are the USDA loans. They're another government-sponsored type of loan, stands for U.S. Department of Agriculture. They are 0% down. They do have limitations, though. You want to watch out. You have to be in a certain rural area, usually like on the outskirts of town. Also, there's income limits. So depending on your household size, USDA, if you make over a certain amount of money, you do not have access, and they are the most strict on debt to income ratio because of the 0% down. Very, very hard to qualify, but not impossible, but just wanted to give you those things to look out for. So don't forget that down payment also affects your monthly payment. The less you put down, the higher your payment. The more you put down, the lower your payment. So another great reason to get with a lender as soon as possible so they can run some scenarios for you so you know which type of loan is best for you, what the payments are going to be so that you can make a good decision. I'll take a quick pause. I've got some great news for you. I have a home ownership course free for you to watch here on YouTube. I'm going to put the link to the series down below. This is also going to help you with knowing what's a good decision for me as I navigate this sea of home ownership and all these details. Okay, back to it. Let's talk about credit score and reserves. So credit score, the higher your credit score, the better your loan terms can possibly be. The higher the credit score, the better the interest rate. Also, the better things like PMI, private mortgage insurance. Now reserves are good in getting your qualifications over the edge. Remember that example where I talked about the veteran and normally you have to have a 55% debt to income. We allowed her to have a 67% debt to income because she had reserves. Now normally the distance and the approval or the exceptions are not that great, not that big, but when you're on the border in some other areas, like maybe you have a little bit lower credit score, when we run the loans, all the lenders have to run the loans through an automated system. All of us have to. Things like reserves help overlook things like a lower credit score, maybe a higher debt to income ratio. So it's really a good idea if you've got reserves that you're either in a savings account, 401k, IRA, those things count. So make sure when you're making an application, be prepared to tell the lender about those things. Okay, let me share two quick stories. A couple made $90,000 together, but they've got some student loans. So they thought can't buy a house because we have this student loan debt, but with FHA and 3.5% down payment, and we were allowing them to go to a 55% debt to income ratio, they actually got approved for a house of $325,000 and they just closed on the home last month. We had another single teacher that was making $52,000 a year and she bought a $210,000 condo with just 3% down using a first time home buyer grant in the state that she lived in. I live in Texas, so it was a Texas state program. She was shocked that she only needed a few thousand dollars to close on this house. These stories are real and they show that it doesn't only necessarily mean that income tells the full story. Another thing to consider is can you get a co-borrower or a co-signer on the house with you to help boost your qualification? That would be someone like an unmarried partner. It could be a relative like a cousin, aunt, your parent, your sibling. Talk to the lender if you have the ability to get a co-signer that could help you qualify for more of a home that you're looking for in the neighborhood that you need to live in. A lot of buyers forget about this, but it can make a huge difference. I'll tell you what, I'm going to plug my video down below in the description about a co-signer and what that means so you can share it with someone that might be co-signing for you so you can know all the facts of what it means to be a co-signer. Okay, here's the formula that I promised you at the beginning. Take your monthly gross income, that's gross before taxes are taken out, and times it by 0.45, that's 45 percent. That number is a safe number for you to assume that will be your maximum allowable debt, including your new mortgage. Now, subtract from that number your monthly debts. Just use the minimum payment on your credit cards, your student loans, your car payment or payments, and any child support or alimony that you might pay if that is applicable. That is going to give you another number, and that number is a general idea of what your maximum house payment can be. Are you still with me? Now, go online and open up a mortgage calculator. Just type in the search bar mortgage calculator. Go to any one. Usually there's a default interest rate there. I would just use that because it'll be probably what rates are at the time, and input what you want your monthly payment to be. Now, disclaimer, a lot of online calculators are not 100 accurate for taxes and insurance, so I do want to warn you this is like a hack. I'm trying to give you a general idea, but I want you to fact check with a lender before you get too excited and start narrowing down houses, etc. I want you to pause for a minute and say, okay, I'm doing these calculations. I'm obviously a little bit serious about this home buying thing. Let me talk to friends, family members, and get a referral to a trusted lender so I can start to get information. Y'all, it's free. You don't have to pay anything to talk to a lender. So just a side note, if you find yourself looking for that calculation, it means you're ready to start talking to a lender to get real facts, no BS. If you're finding that this is helpful information, please do me a favor, like, subscribe, write a comment. I love to answer questions and I check these daily, so I'll respond super quick. So the truth is that you don't need to keep guessing about what your payment's going to be. Do I qualify? That is what I am here for. So what I want you to do is pop me a comment if you have one. Call me. You can look for my contact information in the notes and give me a call. I'm happy to help you. You can also go to my Blueprint for Homeownership course that I'm going to put down in the description that's going to help you with vocabulary and things similar to what we've gone into this video to make sure that you have good information so you can make good decisions for yourself. I'm Jen Hernandez, lender for 29 years. I'll see you on the next video.