- 1 how much house can you afford with 100 000 salary
- 2 how much house can you afford with 100 000 salary
- 3 how much house can you afford with 100 000 salary
- 4 How Much Home, Car, and Debt You Can Afford on a 30, 50, and $100,000 Salary
- 5 The Lame 25% Rule and How Much House You Can (Responsibly) Afford
how much house can you afford with 100 000 salary
There are rules of thumb that help you to guestimate what you'll be able to afford when you go hunting for a home to buy. One rule of thumb is that you can afford to spend 2.5 times your gross household income. In other words, if you and your pal make $100,000 between you before taxes, you can spend $250,000 on a home. Some of these rules of thumb go as high as 5 times your annual income, but we know that lending has become less sensible of late, and I believe if you go over the 2.5 - 3 times your income, you're being overly optimistic, unless you have a whopper of a downpayment.
Nothing beats knowing the actual calculations lenders use to decide if you'll qualify for a mortgage. To determine how much you can actually afford to pay each month for mortgage payments most lenders calculate your "debt service ratio."
There are two different debt service ratio calculations. The first, Gross Debt Service Ratio, or GDSR, deals with the percentage of your gross income it'll take to cover your housing costs including mortgage payment, taxes, heating costs, and half your condo (or strata) fees. Lenders don't want you to spend more than 32% of your gross monthly household income on combined housing expenses.
Let's say you go for a mortgage and you have no debt. Your housing costs (mortgage payment, taxes, heating costs, condo fees) will be $1400 a month. Your gross family income is $4,500. Your debt service ratio would be 1500 divided by 4500 multiplied by 100 (1400/4500*100) = 31%
You're below the 32% -cut-off for allowable GDSR, so you MAY qualify for the mortgage. I say, MAY because there's still another hurdle for you to leap over before you know for sure.
The second calculation - Total Debt Service Ratio, or TDSR, is everything in your GDSR calculation PLUS all your debt payments divided by your gross family income and it tells lenders whether you're going to be able to pay them back. Your total debt service ratio needs to be under 40% for lenders to feel safe giving you their money.
Continuing with the previous example, let's say you had a car loan that was costing you $450 a month. You'd have to add that $450 to the equation: 1400+450/4500*100 = 41%, which is over the acceptable limit. Result: You're declined.
Your car is paid for, and you have no other loans, so you're in the clear. How about that line of credit you've been trying to get paid off for the past two years? That'll have to be factored in. So will those student loans that have been following you around for the past six years. And then there are your credit cards.
"I don't carry a balance on my cards," you announce proudly, "so they won't be a factor."
So you think. How many cards to you have in your wallet and what are limits on those cards?
"$4,000, $6,500 and $8,300." So that's a total of $18,600 in credit.
"But I don't carry a balance" you protest. "I pay my cards off every month. Besides I never even get close to those limits."
The lender doesn't care. Since you COULD run those limits to their max, that's all the lender cares about. So s/he adds in the minimum payment you'd have to make to keep all that credit balanced. Assuming s/he used 2.5% (pretty standard for minimum payments), s/he'd add in $465. Hey, wait a minute. That's even more than the car payment so there's no way you'd qualify.
Can you see why borrowing money willy-nilly can really be a bad idea? All those dinners out, those I- just- have- to- have- it- NOW purchases, those unplanned-for expenses, and those but- I've- been- working- so- hard vacations will come back to bite you in the butt if you've put them on credit.
Want to work out your GDSR and TDSR to see how you're doing? You can get out your own calculator, or you can use this one on the web.
Don't go underestimating what you debt repayments will be in an attempt to fool the calculator into giving you good news. If you don't use the actual minimum you're required to repay on your debt, you're just setting yourself up to be disappointed when you do finally get to the lender.
Assuming your have no debt at all (yippee!), and all you have to think about is your GDSR, you can simply take your monthly gross income and multiply it by 32% to figure out the maximum you can afford for your mortgage payment, property taxes, heating costs, and half your condo or strata fees.
Let's say you have a family income of $7,500 a month. Multiplied by 32%, you're working with $2,400 for your total housing costs. If we estimate your property taxes at $200 a month, your heating costs at $150 and your ВЅ your condo fees at $125, the total amount of your mortgage payment would could be as much as ($2,400 - [200+150+125]) = $1,925.
So, how much home does that translate into. Well, it depends. First, it depends on how much of a downpayment you have. Second, it depends on how long you're planning to carry your financing. Third, it depends on the going rate of interest.
The bigger your downpayment, the more house you can afford.
The longer you amortize your mortgage, the more house you can afford. But the more your home will end up costing in the end. Amortize for 25 years, and you'll end up paying twice the orginal price of your home. Amortize for 40 years, and you'll pay three times the original price of your home.
The lower the interest rate, the more house you can afford. Keep in mind that you shouldn't go to your borrowing limit based on low rates since you have to consider how your cash flow will be affected when you renew if rates are up a point or two.
Of course, the easiest way to figure out how much house you can afford is to get pre-approved for a mortgage by a lender. That'll take all the guess-work out of the experience. Not quite ready to hit up a lender, then try this online calculator.
how much house can you afford with 100 000 salary
$2000/month and leave you $250/month (= $3000/year = 1% of home value) for maintenance and $250/month for utilities. Just rough assumptions here, you can reconfigure the exact numbers as you see fit.
HOWEVER, I would caution you that banks are willing to loan you a lot more than you can REALLY afford comfortably. If you take a mortgage costing $2500/month you can expect to be cash poor and pay off the house very, very slowly. This is a good point. Never go by what the realtor, mortgage broker or banker tells you that you can afford.
how much house can you afford with 100 000 salary
House hunting: How much can you afford?
In 2008, MaKenna Grae* and her husband prequalified for a $2 million mortgage. The couple was stunned. They had never expected to buy a home with a seven-figure price tag.
So, rather than heed the bank's advice, the Graes sat down and figured out how much they could comfortably pay every month. Before they looked at their first house, they had settled on a budget that had nothing to do with the bank's recommendation. Instead of shopping for $2 million sprawling mansions, the couple set out to find a home for about $500,000 in northern New Jersey.
"I cannot imagine what our stress level would be or how crazy our lives would be if we had listened to the banks about what we were approved for and bought a $2 million home," says Grae, who ultimately bought a four-bedroom house for about $425,000 in Elmwood Park, New Jersey.
A real estate rule of thumb
When the housing bubble burst and it became clear that lenders were handing out mortgages with their eyes closed, many banks tightened their lending practices. Buyers suddenly were being asked to show stellar credit ratings and lay out 20 percent of the price of the home as a down payment. But, five years later, as the housing market heats back up again, some banks are loosening the reins and once again offering buyers sweeter deals. For buyers who were shut out of the mortgage business for the past five years, the ability to buy is suddenly real again. But just because a bank thinks you can afford a multimillion-dollar house doesn't mean it's a wise financial choice.
"Remember, the bank is in the business of making loans, and they want you to borrow as much as they are comfortable risking on you — and not a penny less," says Ellen Derrick, a certified financial planner with LearnVest Planning Services.
So how much house should I buy?
Deciding how much to spend on a house isn't always so easy. The monthly payments on a $500,000 house vary considerably depending on the interest rate, your credit score, property taxes, and how much you need to put down. So, before you start scouring the listings, take a cold hard look at your finances and decide how much you can realistically pay.
The general rule of thumb: Mortgage payments should not exceed 28 percent of your monthly take-home pay, says Derrick. So, if you take home $9,000 a month, your mortgage payments should be no more than $2,520. Another way to look at it: The house shouldn't cost more than two and a half times your annual salary. So, someone earning $100,000 a year should be looking at houses that cost no more than $250,000. You should also have enough money set aside in a rainy-day fund to cover six months of household expenses so you can keep making those payments.
There are certainly upsides to buying a house that is well within your budget: It leaves money left over for other purchases. "It's not too much house, but enough for us. And best of all, the mortgage is affordable," says Grae of their home with an open floor plan, spacious kitchen and a pool. "We have enough cash flow that when we need to purchase something, like, say, a minivan, we were able to get the top-of-the-line model and pay cash for it.
With interest rates creeping up and housing prices skyrocketing in some markets, many buyers, fearing they've missed the bottom of the market, are eager to buy a home now. Buyers are putting down less cash, making it easier in the short term to buy a more expensive home. The average down payment on homes with a 30-year fixed-rate mortgage dropped to 16.1 percent in May, down from 17.6 percent in 2011, according to a LendingTree report.
"When I hear people say, 'Yeah, I know I'd have a hard time making the payment, but I just feel like I need to buy something while rates are low,' I just cringe," says Derrick. "Just because interest rates are low does not mean you should buy a house."
*Names have been changed to protect the home buyers.
How Much Home, Car, and Debt You Can Afford on a 30, 50, and $100,000 Salary
Many people believe the key to all their budgeting and debt woes is simply to make more money. A 2015 SunTrust survey found almost 1 in 3 respondents making $75,000 per year or more live paycheck to paycheck on occasion and 1 in 4 respondents making over $100,000 reported the same. Thirty percent of respondents blamed a lack of financial discipline and 70 percent of millennials (ages 18-34) who believe they are not saving as much as they should blame dining out expenses.
Only 25% of US households are fortunate enough to make six figures, so is making more money not the answer or is $100,000 just not enough money? That same year, Business Insider argued that $287,000 is the new $100,000. The answer must be, “it’s complicated.”
Tackling a related topic, Esquire wrote two pieces 4 Men with 4 Very Different Incomes Open Up About the Lives They Can Afford and 4 Women with 4 Very Different Incomes Open Up About the Lives They Can Afford. They’re both an interesting read. Esquire’s respondents had income levels of near poverty, $80,000, $350,000, and $1,000,000 for the women and $1,000,000, $250,000, $53,000, and near poverty for the men. There are at least three things overlooked when people discuss how much home, car, and total debt they believe they can afford based on their income.
Let me begin this section by clearly stating: It’s your money. We didn’t help you make it. You can spend it however you want. But, if each paycheck you consistently have more month at the end of your money, the following might help you understand why.
If you’re online long enough, you’re familiar with the “I WOULD NEVER…” crowd. Recently, our guest for PB51: The Financial Samurai came on to discuss his viral piece, Scraping By On $500,000 A Year: Why It’s So Hard For High Income Earners To Escape The Rat Race. Our first discussion on this topic was one of our fastest downloaded shows ever. While we mostly received positive feedback from our listeners, I did see the “I would never…” comments around the internet.
Regardless of the context of the discussion, the “I would never” personality type draws sweeping conclusions that begin with “I would never…” and conclude with “…spend $200 on a date; $15,000 on a ring; $100,000 on a car; $650,000 on a home!” The amount of the particular expense the internet is fighting about that day doesn’t matter because a true “I would never…” would never spend it. These people are universally frugal, financially responsible stewards and a statistical anomaly to all things personal finance.
This is only strange because social media readily shows that most of these same people’s credit utilization compared to their estimated income already commits more of their salary and debt to the exact same categories they judge others about. They just don’t realize it, or maybe they don’t care. The latter would actually make more sense, but that would also imply the internet is bound by sense-making rationale.
To simplify this discussion, we’ll use three gross incomes to estimate how much home, car, and other debt they can afford on $30,000, $50,000, and $100,000 based on best practice recommendations from various industry leaders and lenders. The following monthly breakdown is recommended for each expense category: 30% for mortgage/housing ratio (or rent equivalent), 10% for a car (includes principal balance, interest, and car insurance); and 10% for debt.
The estimates provided are max allocations for each category. In the real world, you’ll be better off spending less in all three. In fact, a total of no more than 43 percent debt-to-income ratio (all your monthly debt payments divided by your gross monthly income) is recommended, in most cases, since this is the highest ratio most borrowers are allowed to have and still get a Qualified Mortgage according to the CFPB. Based on these max allocations, here is how much home, car, and debt AnonymousInternetPerson247 can afford month-to-month:
Keep in mind that banks and lenders are businesses. They are not your friends (or your enemies). Even the above industry-recommended scenarios would put you nearly 50% in debt each month. Banks are lenders. They are not in the business of telling you how much lifestyle you can afford. They are in the business of telling you how much they can lend you to spend, so they can make a profit and maximum return on their investment in you. It is your responsibility to determine what lifestyle you can afford.
Depending where your monthly payments fall, the table above either made you really relieved or really upset. Let’s explore some possible reasons why. The simplest of which is that $100,000 isn’t always $100,000. This is why we recommend you use the free CNN Money Cost of Living Calculator if you’re ever thinking of moving or relocating around the country and you want to understand how far your money will or will not go in your new city. If you want an even more detailed breakdown, we recommend using BankRate’s Cost of Living Calculator. BankRate’s even more detailed calculator will tell you everything you need to know down to whether you can still afford cheese on your cheeseburgers (or avocados on your toast).
In the scenario below, our home-based city will be Austin, Texas. AnonymousInternetPerson247 listened to the PaychecksAndBalances podcast and is considering jobs in the following cities. They use CNN Money’s calculator to estimate how much comparable gross salary they’ll need to make in these cities to maintain the lifestyle they’ve become accustomed to at the equivalent of $55,000. As you can see, they need to find a job making over $100,000 in places like New York and San Francisco. Also, cost-of-living can vary widely within the same state, which is why they can maintain the same lifestyle on $5,000 less if they relocate to a lower cost of living city, like San Antonio.
Always Stay Gracious. The Best Revenge is Your Paper.
The beauty of the internet is that it brings together a wide range of people from every background you can think of. Most days, this is a good thing. However, comparing $100,000 in New York to $100,000 in California is not one of those things. It’s not apples-to-apples or even money-to-money. It’s wrong to incorrect. The same can be said for most every other city in the United States. More importantly, whether you are an “I would never…” yourself or simply a casual observer of an I would never discussion, 2 outta 3 people don’t even have a budget or know how much they are spending day-to-day, month-to-month, or year-to-year. Is it possible that 100% of these people are not represented in these online conversations? Yes, but I doubt it.
If you want to be like everyone else, you need not change anything about your spending habits or your personal finances. You can do the exact same thing today and expect a different outcome tomorrow, but the odds are not in your favor. Now if you want a different outcome than the average person, you’ll need to make the personal decision to think differently, then you’ll need to act differently. If you practice good personal finance habits, spend less than you earn, and do this consistently over time, one day you might be lucky enough to have someone comment on your social media, “I would never…” and you can react with the best response of all time: no reaction.
The Lame 25% Rule and How Much House You Can (Responsibly) Afford
Right now, home prices are low, and mortgage rates are attractive.
As a result, the temptation to buy is great, especially for first time homebuyers who want to get in now, while they can save big.
However, just because you think now is a good time to buy does not mean that you should. Make sure you know how much house you can afford on your income before you jump in.
Here’s a question I recently received from a friend and reader about how much house he could afford on his income. He referenced Dave Ramsey’s rule of thumb about not having a mortgage payment for more than 25% of your salary:
I have a Dave Ramsey question, PT. I’ve Googled around and cannot find the answer, and was wondering if you knew. Ramsey states that you should spend no more than 25% of your income on your mortgage. Do you think he wants you to calculate property taxes and insurance in your “mortgage payment,” or do you think he is simply calculating principal and interest?
In my answer I said, “yes, Dave definitely wants you to include it.” The second comment on this post suggest that he said so specifically in one of his newspaper columns. Further, taxes and insurance are guaranteed, so you should consider it.
I went on to say that a rule of thumb (most are kinda lame) is limited in it’s simplicity. For instance, I can go out and get a adjustable or variable rate mortgage payment that’s less than 25% of my take home pay today, and tomorrow the housing market could crash another 30%, rates could go through the roof, and I could lose my job. Owning the home outright as quick as possible is sounding like a better rule for the future.
There are a number of things you can do to reduce the cost of your first home, but you still might not be able to handle the costs of homeownership. Let’s look as some ways to help determine the answer to the question, “how much house can I afford?”
In some cases, your mortgage plus interest may be more than your current rent payment. But that’s not all. As we mentioned about, homeownership comes with other costs, including:
- Property taxes: You will need to make property tax payments. Whether a yearly lump sum is due, or whether you pay monthly with your mortgage payment, this is something to prepare for.
- Maintenance and repairs: No longer can you have the landlord bear the cost of maintenance and repairs on your dwelling. You are responsible for the costs associated with keeping up the home, and taking care of it. This can cost more than you might expect.
- Utilities: Many people forget to consider the extra costs associated with a home. In many cases, your home is larger than your rental. This means that it will cost more to heat it. Electricity and water costs are likely to go up as well. And, if your landlord previously paid sewer and garbage collection costs, these are additional expenses.
- Falling home values: When you are renting, your landlord bears the cost of a falling home value. If you buy, though, you could find yourself underwater — especially if your down payment was small. Are you prepared to take the risk that your home will decline in value?
Before you buy, it is a good idea to go for a “test run” with the increased costs of home ownership. One thing you can do is take 30% of your expected mortgage and interest payment and add it back on. So, if your expected mortgage and interest payment is $1,100, add $330 so that your total estimated monthly costs are $1,430.
Then, consider the difference between what you pay now for your rental and the estimated cost. If you pay $850 in rent now, it means that you will pay an extra $580. Can you afford that much house? Let’s find out with a real savings test. Next, open a high yield bank account. Put that extra $580 in the account every single month. Do this for at least four months. Are you having difficulty making the new “payment”? If so, you might not be ready to purchase a home. The higher costs may exceed your ability to pay for them.
Before you buy a home, you need to make sure that you are truly ready to shoulder the costs. Otherwise, you will be house poor, and your monthly cash flow will be strained. You could end up in a worse position than if you continued to rent.
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