If you’re in the market for a new home or a first-time home buyer, you’ve probably asked yourself, “How much house can I afford based on my annual income?” There are so many factors to consider it can be overwhelming.
How much house can I afford in Texas making 100k a year?
|Borrower A||Borrower B||Borrower C|
|Down Payment||$40,500 (10%)||$11,500 (3.5%)||$96,000 (20%)|
|House Max Budget||$405,000||$330,000||$480,000|
The above table gives an estimate of how much house individuals with a 100k annual income in Texas can afford. You can easily calculate yours using the Home Affordability Calculator (Zillow). The value of the home or mortgage you can afford in Texas is dependent on several factors such as down payment, DTI (debt-to-income), and household expenses. Knowing how much mortgage you can afford will help you narrow your real estate search, save more money and time.
Top Factors for House Affordability
Below are several factors you should take into consideration if you want to find out how much house or mortgage you can afford based on your income.
How Much Mortgage Payment Can You Afford?
There’s a common rule in lending called the 28/36 rule. It is essentially a rule of thumb for figuring out how much house you can afford.
This means your entire housing expenses each month shouldn’t exceed 28% of gross income. And your total debts shouldn’t exceed 36% of gross income—which includes your mortgage, student loan debt, car loans, etc.
To find out how much house you can afford, you need to take into consideration the amount of mortgage payment you can pay. The majority of prospective home buyers have little to no idea of what makes up a monthly mortgage payment. Monthly mortgage payment or PITI (Principal, Interest, Taxes, and Insurance) consists of:
This is the amount that is going towards the mortgage balance. That is, the money you borrowed to acquire the house.
This is the rate the lender or creditor charges for loaning you the principal. In perspective, this is what the lender or bank is going to make by giving out the loan.
This is your property taxes. They are usually county and state taxes. The amount of taxes you are liable to pay monthly varies by properties. The property tax for a condo will be different from that of a townhouse. So, when you are looking at a property, ask your agent what the taxes on the property are.
This is your homeowner’s insurance, which protects your home in the event of a disaster, damage, or loss.
Here Is How to Figure Out Your Monthly Mortgage Payment:
When you walk into a lender’s office, the first thing they look at is your front-end ratio or mortgage-to-income ratio. Your front-end ratio is your estimated monthly mortgage or PITI (Principal, Interest, Taxes, and Insurance) divided by your gross monthly income.
Total Amount of Your PITI ÷ Your Gross Monthly Income = Your Front-End Ratio.
Your Front-End Ratio × 100 = Your Front-End Percentage.
|Calculate Monthly Mortgage or Front-End Ratio Steps||Values|
|Add up your PITI ($800 + $400 + $500 + $500)||$2200|
|Gross Monthly Income (Before taxes) Divide PITI by Gross Monthly Income: 2200/8333||$8333 0.26|
|Multiply by 100: 0.26 x 100||26|
|Evaluate if Front-end % is below 28%||26%|
Let’s say you have a monthly gross income of $8,333 and spend $2,200 between your mortgage payment, homeowner’s insurance, and property taxes. In this case, to find our housing expense ratio:
To get your front-end ratio percentage, multiply 0.26 by 100 and you have 26%.
So, based on our earlier discussion about the 28/36 rule, you’ll want your monthly mortgage payment to be less than 28% of your gross monthly income.
How Does Your Debt-To-Income Ratio Impact Affordability?
The next determining factor is your debt-to-income ratio or back-end ratio. You may have heard your friends or colleagues say things like, “I couldn’t get the house because my debt-to-income ratio or DTI was too high”. Well, your debt to income ratio compares your gross monthly income to your debt. It is simply a division of the debt on your credit report by your gross monthly income.
Lenders or Creditors look at this number to determine your ability to take on more debt. The higher your DTI, the harder it will be for you to get a mortgage or even a good interest rate. In fact, most lenders wouldn’t consider a borrower with a DTI above 45% (depending on the lender and loan program).
How to Figure out Your DTI:
Amount of total monthly debt ÷ Gross monthly income = Debt-to-income ratio
Debt-to-income ratio x 100 = Debt-to-income ratio percentage
|Calculate DTI Steps||Values|
|Monthly Debt (Car payment, Phone bill, etc.)||$1750|
|Gross Monthly Income (Before taxes)||$8333|
|Divide Debt by Gross Monthly Income: 1750 / 8333||0.21|
|Multiply by 100 0.21 x 100||21|
|Evaluate if DTI% is below 36%||21%|
Let’s say you owe $1750 in total monthly debt (mortgage or rent payments, credit cards, student loans, car loan, and other personal loans) and make $100,000 a year ($8333/month). We’d then take the 1750 divided by 8333 to get our debt-to-income ratio. Like so:
1750 ÷ 8333 = 0.21
To get your debt-to-income ratio percentage, multiply 0.21 by 100 and you have 21%.
While the 28/36 rule says that you shouldn’t have more than 36% as your DTI percentage, many lenders will be willing to provide you a mortgage up to 45%. With our DTI percentage at 21%, we are well in for a good mortgage and interest rate. You can calculate yours using the above method.
What is Your Downpayment?
Whenever I discuss affordability with first-time homebuyers, one of their major concerns is about down payments. I get questions like, Should I pay 6% or 7% or even over 20% of the price of the house? The truth is that there is no straightforward answer to this question.
The minimum amount you put forward as a down payment is determined by the mortgage program you are applying for. Most of the widely used mortgage programs minimum down payment requirements are:
- FHA Loan: 3.5% down payment minimum
- VA Loan: No down payment required
- HomeReady™ Loan: 3% down minimum
- Conventional loan (with PMI): 3% minimum
- Conventional loan (without PMI): 20% minimum
- USDA Loan: No down payment required
- Jumbo Loan: 10% down
Putting a large down payment may not always be the right choice to make when buying a home. You should always make your down payment decisions based on your present financial situation. It is great to put 20 percent down if you want to avoid mortgage insurance, access lower interest rate, and monthly payment. But if you are looking to move into a house quickly and build equity, a low down payment may be your best bet. Remember you can refinance your loans into a lower rate with no mortgage insurance in years to come.
Now you are wondering, does a bigger down payment equals more house? Yes, it equals more house. But your income, housing expenses or front-end ratio, and your debt-to-income ratio plays a bigger role in the amount of house you can afford.
Often, when home buyers call in for consultations, they say, “I did my calculations and I should be able to afford a house worth $500k because I earn $100k yearly.” It doesn’t just work like that. You need to factor in:
- Mortgage insurance
- HOA dues
- Current debts
- Variable income
- Down payment
- Monthly expenses
- Credit Score
- Mortgage payment
It is advisable that you contact a qualified mortgage officer for more professional advice. Most of the figures used in this article are based on imaginations and shouldn’t be taken as final.