Choosing how large a house to buy is one of the most important financial decisions any individual has to make. Purchasing an excessively large house can also prove financially unwise and often one can end up with little or no cash left. However, purchasing a little house may be a disadvantage because one may fail to afford the necessary space for the family or certain activities. Supposing you earn $80,000 every year, this is how you can identify the range of home prices that will suit your circumstances.
First, know your total monthly earnings or income from all Sources of income that you the income earner receive in a month.
Consequently, lenders often consider gross monthly income before tax when deciding the affordability of a mortgage. With your $80,000 yearly pay, your gross income each month would therefore be $6,666.67.
Your house payment should be paid from no more than 28% of your monthly salary. Simplified as PITI, this covers taxes, insurance, interest rate, and principal amount. Thus, if you earn $80,000 a year, you may generate $1,686 monthly to pay the mortgage.
Homebuyers should save for a down payment after realizing they are ready to buy a house and have conducted market research to choose a suitable one.
If you can make a higher down payment, you will be able to bargain for a lower rate and more sensible monthly mortgage payments even if there are choices that call for you to down as little as 3-5% of the buying price of the house. According to financial experts, people can only afford to spend up to 20% of their salary on property acquisition.
A 20% down payment on a $300,000 house, typical for a $80,000 salary, will be $60,000. Should you not yet have that kind of money, you could have to rent a bit longer to save or maybe think about a more reasonably priced house. Though providing 10% down like $30,000 may also not be awful, donating 20% ($60,000 on a $300k house) may not be practical.
The third option is to figure out other monthly debt
Lenders will also consider the amount of money you spend on paying your monthly bills, which is referred to as the debt-to-income ratio when deciding whether to approve your mortgage loan. This comprises your future mortgage payment or any other loans you may have such as credit card balances, car loans, college tuition fees, and any other personal loans.
These ratios vary depending on the organization, but a good rule of thumb is that total monthly debt should not be more than 36% of gross monthly income. With the $80,000 annual income and $6,666. 67 per month, you wouldn’t want your monthly obligatory payments, including a future mortgage, to exceed $2,400. Remember to determine your other loan requirements before setting your price range.
Use an Affordability Calculator
Having got some figures, including the 28% rule for housing costs and 36% for total obligations, you can enter an online mortgage affordability calculator to get the price estimate.
For today’s average, 30-year fixed interest rate of 3% on $300000, the PITI would cost approximately $1,265 a month. Even when you factor in taxes and insurance it is just about $1,800. If you have other monthly expenses like car loans, student loans, and so on, then a mortgage of about $300, 000 will be affordable for a person earning $80,000 per year.
Go ahead and toy with the mortgage calculators for a while and you’ll discover that an appropriate price between $250 000- $350 000 is possible. The exact amount, however, mainly depends on your distinct credit commitments, down payment saved, and the ability to spend 28% of your income on habitation.
Memo to Self: When Setting Your Asking Price for Your Property, Remember That the Price Should Be Appropriate for Your Local Real Estate Market.
So, let’s say you earn $80k annually; well, this will be fine in terms of financing a $300,000 home purchase from a debt ratio perspective, but it will not mean you can acquire a $300k home in the right neighborhood! Real estate markets are big and different from one state to another across the country. What $300k can buy in terms of space and facility in some areas of the Midwest, for instance, would be significantly bigger than what it can purchase on either coast.
Check local property sales records in your target neighborhoods to determine market price activity where you plan to purchase property. You might also have to consider lowering or increasing your price ranges based on the results. Some adjustments such as the size, condition, amenities, or location might have to be made in other to purchase houses in more expensive markets for an $80k income.
And do not forget that even if you meet all the requirements to get a certain amount of mortgage it is rather questionable from the point of view of finance. It is important not to be tempted to buy the most you have been approved for by the lender, but to be very wise and consider your standard needs, savings, spending, and job prospects.
Pad Your Estimate
Finally, under no circumstances should one input exact figures when estimating home affordability; instead, it is wise to round down a little bit. The mortgage payment plans frequently change depending on the interest rates that prevail in the market. Other costs include any repairs that may be required within the house which sellers may have concealed from buyers, especially first-time buyers.
It helps to not ‘overstretch’ oneself when qualifying for a mortgage, by going up to the ‘maximum’ and a little below prepares one for the inevitable hitches that come with being a homeowner. All types of overbuying, but especially when it comes to living space, usually turn into a problem eventually.
Based on the income-to-price relationship, an annual wage of $80,000 is within the capacity to afford a home worth $250,000 to $350,000 depending on other factors. Rerun all the budget estimates, put down as much down payment as you can afford, and tailor your maximum sum up to arrive at a reasonable and achievable price range for a home. Prudence when buying a home is a wise strategy because it provides the stability and financial security that is more valuable than more space or additional conveniences in the long run.
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