How Much House Can I Afford?

Grant Wydeven

Afford a Home With $60,000 , $70,000 and $100,000 Salaries

Here are the strategies to know how much house I can afford so you can live in a beautiful home without worrying about an insane mortgage. 

And at the end of this video I’ll show you how a single person making $60,000 can afford to live in a massive 5 bedroom home like this while keeping their debt minimal and payments within their budget..

So if you’re a homeowner or soon to be you need to know these strategies to ensure you live comfortably in a home you enjoy without crippling debt and massive payments. 

Main topics to cover are:

  1. The 4 driving factors to determine your affordability and why they’re so important
  2. DTI and the 28/36 rule
  3. Different mortgage options

4 Factors That Effect Home Affordability

Key factors in calculating affordability are 1) your monthly income; 2) cash reserves to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.

  • Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
  • Cash reserves – This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.
  • Debt and expenses – Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
  • Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate you’ll earn.

DTI and the 28%/36% Rule

“To calculate ‘how much house can I afford,’ a good rule of thumb is using the 28%/36% rule, which states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards and other loans like auto and student loans.

Example: If you earn $5,500 a month and have $500 in existing debt payments, your monthly mortgage payment for your house shouldn’t exceed $1,480.” -Nerd Wallet

Video Transcript:

Hey, what is going on? These are the strategies that you need to understand in order to know how much house you can afford. So you can live comfortably in a house that you enjoy without an insane mortgage payment that you struggle to make every single month. And at the end of the video, I’ll show you an example of how an individual making just $60,000 a year can afford to live in a massive five bedroom home, just like this one.

While keeping their debt minimal and payments under control. So stay tuned for that. You don’t want to miss out on it. So if you’re a homeowner soon to be you, absolutely. We need to understand these strategies beforehand to ensure that you live in a home comfortably, that you not only enjoy, but can afford while avoiding crippling debt and massive payments and the best way for you to understand how much house you can afford is by explaining these.

Three topics. Alright. So topics number one is understanding the four key factors that go into affordability and why they’re so important to know beforehand topic. Number two, two is understanding how to calculate DTI and knowing the 28 36 rule. And then topic number three is understanding your different mortgage options.

So you get the best deal possible. Now, before we get started, it’d be awesome. If you could smash the subscribe button, if you’re brand new to the channel here, and don’t forget to hit that like button as well as it really does help out with the channel and for the comment of the day today, I want to know what is your dream home?

Like? What does it look like? Where is it located in everything about it? Because I do think that all of us do have a dream home. We’d absolutely love to live in someday. So comment down below, and now with all that out of the way, let’s go ahead and jump right into it. Now, starting off with the four key factors that are going to determine the affordability and why they’re so important.

We of course have income. One of the most important things to understand before purchasing anything income, obviously enough is going to be any money that you take in, whether it be through your daily job. And sort of investments that you have or any side hustle, the passive income that you have set up in income is important.

There are three equally important factors that go into this as well. The second one being your cash reserves, even if you make an insane amount of money every single month, and your income is quite high. If you have absolutely zero cash reserves at all, you’re going to be missing out on a lot of security and you might not be able an ideal of down payment to give you the best mortgage possible.

And of course these cash reserves are any sort of money that you have laying around in a savings account. It could even be in your couch. I don’t care, but it’s going to cover things like closing costs down payment in any sort of fees that come up along the way. Next on the list in factor number three is debt and expenses.

Once again, you can make an insane amount of money, but if you’ve completely mad max out your expenses and you have a large amount of debt, you might not even be able to. I live in as nice of a home as someone making quarter of your income. So understanding your debt and expenses is incredibly important as well.

These of course are your monthly obligations that you have to pay. This includes credit card debts, any sort of student loans that you have, car payments, groceries, utilities, et cetera. We’re talking about those standard monthly bills that come every single month that we all know and love. And then finally factor number four.

And this one kind of flies under the radar because despite having an insane amount of money, hypothetical situation, your credit profile is just as important. If you have 18. Terrible credit profile and terrible credit score. You’re going to have a lot harder time getting a solid mortgage rate, and therefore you’re going to be paying out the wazoo.

So as you might already know, your credit score is going to influence your lenders approval rate and their general view. As you, as a borrower, typically speaking a credit score over 720 is considered good enough. And at that point, I don’t believe that you can get any better of a mortgage rate, even if you had, let’s say.

  1. Now, once you’ve crunched all of those numbers, it’s time to move on to step number two, which is calculating DTI and following the 28 36 rule. Now, if you don’t know what DTI stands for, it stands for debt to income, more specifically, a debt to income ratio, where you can best understand your overall debt in comparison to your income that you’re bringing in every single month.

And so an amazing rule to follow if you can, is that all of your monthly home expenses? You know, everything that goes into it from utilities to the actual mortgage itself, property taxes, you name it. It should not exceed seed more than 28% of your monthly income. And now what’s your new home debt on top of that, combined with any other sort of debts you have, shouldn’t exceed more than 36% in total of your income.

So if your home expenses do in fact, take up 28% of your income, that means you can only spare it another 8% at any other debt you might have. So here’s an example. Listen up. If you earn $5,500 a month and already have $500 in preexisting debts, payments, mortgage should not exceed $1,480. Now keep in mind, the 28 36 rule is just a rule of thumb in something to follow by.

You’re still gonna want to take a look at those financials and understand your security and whether or not your income is stable and a bunch of other different factors. So now that you know, that the key factors that determine affordability and understanding a great rule of thumb on if you can afford something or not, what’s the best way to get a great deal on your mortgage.

And ensure that you keep that mortgage payment as low as possible. All right. So first up we have conventional financing. This is probably the most popular way to purchase a home. And this is assuming that you’re putting 20% down for a down payment on your home. Now this can be a 15 or a 30 year fixed rate mortgage.

I would not recommend any sort of longterm mortgage that is not a fixed rate. No sort of balloon payments, no increase payments after five years, nothing of the sort stick with any sort of fixed rate images that you can find, and depending on your credit score and basically your borrower profile, you can expect an interest rate for a conventional loan to hover anywhere from.

Three to maybe even four and a half percent. Now keep in mind too, while you’re paying this mortgage down, inflation is going to be on your side. This is a little side note I want to include, because let’s say you just signed up for your mortgage and you have a $200,000 loan amount that you eventually I have to pay off in a 30 year period.

Well, that $200,000 is completely fixed as well as the interest rate attached to it. And as we all know, thanks to the wonderful thing called inflation, which may makes everything more expensive over time. That $200,000 won’t be nearly worth. $200,000 in 30 years from now, it will be worth a lot less. So with an average inflation rate of, let’s say around 3.1%, and let’s say your mortgage interest rate hovers around, let’s say 4%, truly your only cost then is 0.9% interest rate if we are calculating for inflation.

So keep that in mind. Now, what do you do if you don’t have it 20% to put down? Because depending on the purchase price of the home, that can be a lot of money for us. Especially if you’re younger and let’s say you’re trying to get out of an apartment and get into your first home. Well, then you might want to consider something called an FHA loan where you can put as low as 3.5% down.

Not only is this great for people who don’t have a bunch of money laying around in can’t, so they put 20% down, but on top of that FHA loans have a lot more relaxed standards for application. If you have a. A worst credit score. For example, you might still be eligible for one. Now, keep in mind though, if you are putting less than 20 only percent down, you do have to pay something called PMI or, or private mortgage insurance.

Let me explain. Now we’re all pretty familiar with insurance. If you’re a normal functioning adult, we pay insurance on a, a lot of things. So what banks like to do when you put so little money down is that this extra feed, this private mortgage insurance, this PMI. And this is going to be a small, additional fee could be less than your phone bill, but basically they want you paying this amount into we’ve built up enough equity in the home where you are now technically 20% down, which you would have been from day one.

Had you put more money down. This is to give the bank or the lender, extra security and make sure you have, you know, skin in the game. So if you are putting that little of money down, just be ready to pay a little additional fee every single month. For private mortgage insurance. Now, before we talk about how an individual making $60,000 can afford a massive five bedroom home, just like this one, let’s first talk about one of the other mortgage options.

And that is for you veterans out there. I wanted to include you guys because you have a bunch of benefits here, making sure to capitalize on what’s called a VA loan. Now with a military connection, you could be eligible for a VA loan. Now that is a huge. Deal because mortgages that are backed by the department of veteran affairs, oftentimes don’t need a down payment at all.

So if you don’t want to put 20% down, and if you don’t even want to put 3.5% down with an FHA loan, and you do have some sort of military connection check to see if you’re eligible for a VA loan, it might just save you thousands of dollars in the beginning with no down payment. So if you’ve made it this far in the video, thanks.

I’m going to reward you with this awesome bonus example that I promised earlier in the video. So let’s go ahead and jump into my computer and let’s crunch these numbers. All right. So I found this home on Zillow. Um, apparently it turns out that Arkansas is one of the most fordable places to own a mansion.

And so here we have it right here, a five bedroom home, and it’d be hilarious if one of you watching ends up buying this place. Cause it is really nice. But here we have a five bedroom home, three bath, 2,500 square feet for 330, $35,000. So how can someone just making $60,000 a year for this? Well, if we go down into our monthly costs and we calculate the principal and interest, the mortgage insurance, any sort of property taxes, home insurance and HOA fees, you know, so you can make sure you have that beautiful front lawn and no one has an ugly trailer parked out front.

You can see that it comes to a total of 1479. Now, if we know we’re making $5,000 the month, cause like I said, we’re making $60,000 a year. That means that if we take our monthly fees right here and divide that by our monthly expenses. You can see we’re just at the 29% Mark, which almost falls under our 28 36% rule.

Just barely missing the Mark. Now, does that mean this purchase is off the table because it’s 1% higher. No, remember it is just a rule of thumb. And though it is completely outrageous for any individual person making that amount of money to live in a five bedroom home that’s over $300,000. It technically would be possible and would follow that rule of thumb.

And so that is how you’re gonna be able to calculate your affordability. Once again, though, it is on a personal basis. What is your risk tolerance? What is your credit score? Understanding your key factors in valuing what’s important in life. And it has, we know with expenses, there’s always a give and take.

And if you’re maximizing your expenses on your home, you might not be able to spend as much on traveling. Going out to eat or maybe buying a nice car, but as long as you follow the rules of thumb in this video, I am sure you will be able to live comfortably in a home that you enjoy with out without drowning in debt and being cared, or I hope you guys enjoyed the video and I hope you learned something don’t forget to subscribe.

If you haven’t liked the video as well, and comment down below anything that you learned. And if you haven’t already let me know what your dream house is like. That is the comment of the day. Thank you again for watching and I will see you next time.