Homeownership has long been thought of as part of attaining “The American Dream.” However, in the wake of the housing bubble crash, many people are thinking twice before purchasing their first home. One of the most often-asked questions is “How much money should I make to buy a house?”
Of course, the answer to this query will vary according to where you live and the price of the house you wish to buy, but there are ways that you can calculate an estimate of what your income should be to buy a house as well as home insurance.
How Expensive Is the House You Wish to Buy?
Housing prices vary significantly from state to state and city to city. Even within a single city, housing costs can be all over the board depending on the neighborhood you wish you live in. Frequently, purchasing a house in a more expensive neighborhood will mean better schools, safer living conditions, or a more convenient location.
Be sure to consider your long-term plans when choosing a neighborhood for your first home. According to the five-year rule, if you decide to sell your home and move to a better one within five years of purchasing it, you may end up just breaking even, or even losing money on the deal. This is because of the realtor’s fees and closing costs associated with selling your home.
Once you have determined an approximate amount that you will need to purchase your home, you can begin to calculate the amount of income you will need to reasonably afford it.
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How Much of a Mortgage Can You Get Approved For?
The first step to buying a home is getting pre-approval on a mortgage. If you cannot qualify for a mortgage in your price range, you probably do not yet earn enough money to buy a house. Of course, you do not need to check with a mortgage lender to determine how much you can reasonably afford; you can calculate an estimated figure yourself, as I will explain later.
So, how are pre-approval amounts calculated by mortgage companies? Different financial institutions may use slightly different calculation methods, but for the most part, lenders will take into consideration your monthly household income (including income generated through interest, investments and child support) as compared to your expected monthly mortgage payment.
At one of the banks where I used to work, mortgage lenders prefer that your total mortgage costs (including principal, interest, property taxes and homeowners insurance) do not exceed 28 percent of your gross household income.
In addition, lenders will be looking at your monthly expenses. If you are paying $300 per month on your credit cards, another $500 per month on your car loan, and still another $350 per month on your student loans, this will significantly decrease the amount of income you have left to put toward a house.
Mortgage lenders are more likely to see you as a good candidate for a loan if your monthly debt payments do not exceed 36 percent of your gross monthly income, so keep those figures in mind when calculating your costs.
How Do I Calculate How Much Income I Need to Buy a House?
Once you have a rough estimate of how much you plan to spend on a house, you will need to determine how much your property taxes and homeowners insurance will cost you per month. Property taxes will vary from one location to another and will typically include school taxes and county-assessed property taxes.
You can look for tax rates online or get an approximate amount by asking a local real estate agent or a homeowner who lives in the area. Likewise, when estimating homeowners insurance rates, you can contact an insurance agent to get a rough idea of how much you can expect to pay, or you can request rates online.
There are a number of mortgage calculators available on the Internet. Use one to get a rough idea of how much your total monthly payments will be by plugging in the cost of the house, your estimated down payment, and the approximate costs of real estate taxes and insurance. You can obtain mortgage interest rates at a local bank’s website to plug in the rate. Remember, these numbers do not need to be exact. You are just looking for a rough estimate.
Once you know your approximate monthly mortgage payment, take this number and divide it by 0.28 to get your necessary gross monthly income. You can then multiply that amount by 12 to get your necessary annual income.
necessary annual income = 12 x (mortgage payment / .28)
Therefore, if your expected mortgage payment is estimated at $1000 per month, you will want to have an annual income of at least 12 x (1000 / .28), which means that your gross annual income should exceed $42,857.
Of course, these numbers are simple estimates, but they provide a good way to determine what your income should be to buy a house you are interested in. Good luck with your efforts at purchasing your first home.