A large reason we went through the 2008 mortgage crisis was simply because people were buying homes that they could not sustainably afford. This session will help you figure out how much home you can afford in a sustainable way.
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DEBT TO INCOME RATIO (DTI)
This is a basic ratio that lenders use to see how leveraged (how much debt you use) you are in your finances.
The calculation is:
Total monthly debt / monthly income
The total monthly debt is all things RECURRING. Examples include credit cards, vehicle payments, gym memberships, cell plan etc.
Inputs: 60k yearly income
35% ideal debt to income ratio
60k/12 months = 5k gross monthly income
35% of 5k = $1750 in monthly debt
That means the aim here is to have all your recurring debts (see examples above) be 35% of your income OR lower.
USE A MORTGAGE CALCULATOR
I encourage you to simply search “Mortgage Calculator” and use one. Tinker with some of the settings like the DTI, purchase price, mortgage term length (10, 15 or 30-year mortgage). This will be really helpful in you seeing with your own eyes how much a mortgage is going to cost you over the long term (hint: it’s a lot of interest).
The rule of thumb for a down payment (for a conventional) mortgage in 20%.
Let’s use the same example as the last session.
Inputs: 20% down payment toward home
200k purchase price
20% of 200k = 40k
That means, in order to avoid PMI (see session one) you need 40k to buy the home.
CLOSING COSTS: GUARANTEED
These are typically 2-5% of the purchase price. This is how all the paperwork processors and other parties of the transaction are paid. This is their job coincidentally.
3% of 200k = 6k
This can surprise first-time homebuyers so be prepared for this.
REMODELING COSTS: IF YOU CHOOSE
You may remodel the home before you move in. I have no idea how much work you want to put in so that is something you will also have to consider. Remodels cost as little as 5k and as much as 100k.
I remodeled my home (bathroom, kitchen, floors, new paint) and it cost approximately 40k. And a lot of the labor was myself and family/friends. So again, be prepared for this.
- Debt to income ratio
- Down Payment 20%
- Mortgage Calculator
- Closing Costs
Becoming familiar with these because they are all necessary to moving forward in the home buying process.
What other tools are useful in the buying process?
What mortgage calculator is the best out there?
Is 35% the right DTI to have? What’s your opinion on what I said?
Always Moving Forward,