Do You Make Enough to Afford a House?

64% of Americans own a home. Millions more aspire to get there.

If you are an aspiring homeowner, you probably spend a considerable amount of time pondering on how to bring your dream into fruition.

In this article, we get down to what is probably the largest obstacle to owning a home: finances.

One question most people struggle with is the adequacy of their income. Is your gross monthly income enough to qualify you for a mortgage? Read more to find out.

Would I qualify for a Mortgage?

You can go about buying a house in two ways; the first is by saving up enough to pay for it upfront. The second is by taking a loan or a mortgage.

If you are like most Americans, financing is the more feasible option.

Buying a Home on Mortgage

A mortgage is essentially a home buyer loan, with the amounts you qualify for resting primarily on your income.

The purpose of this is two-fold:

  • It assures the lender that you can comfortably make payments
    • It ensures the payments you make on your mortgage do not strain your finances

Another factor that plays into a mortgage is the down payment.

This is the amount of money you put down on your house, while your mortgage covers the rest. This is a mandatory requirement unless you get a financier that can advance you a zero down payment mortgage loan.

Can I Afford a House with My Gross Monthly Income?

To calculate what income is sufficient to purchase a house, its best to use the same parameters financiers use.

While the figures you get are not the exact amounts you can access, you will get an idea of what might be advanced to you.

Here are the three common calculations to determine how much financing you can access on your current income:

  1. the Back-End Ratio

This is also known as the 36% rule. This bulks together all your monthly minimum debt payments and divides them by your gross income.

The gross income is as per your pay stub. You can follow this link to see how to create your pay stub.

It is advisable to keep this figure at 36% or less. If your calculations exceed this figure, your options are to increase your income or to find a house of a lower cost.

  1. Housing Expense to Income Ratio

This is also known as the 28% front to end ration.

Here, the mortgage financier will take projected housing expenses of the home you hope to purchase and divide the figure by your total income.

Generally, mortgage companies are looking for a ratio of 28% or less. Calculating this figure can give you a ballpark of the amount you can get in financing.

  1. Multiply Your Annual Income by 2.5 or 3

This is yet another way to determine if you make enough to afford the house you have been eyeing.

Multiply your gross income by 2.5 or 3 to get an idea of the amount you can be financed for. This also means that this is the maximum amount you can spend on a house.

Bear in mind, however, that this is only a rule of thumb. A lot of variables will factor into the lender’s decision, and these will alter the loan amounts advanced to you.

My Income Is Sufficient, What Next?

If your gross monthly income is enough to afford you the house you want, you can now take the next steps toward a home purchase.

Key among these will be identifying the best lenders in the market. Here you will be looking for a reputable financier with the lowest processing fees and interest rates.

Nonetheless, keep in mind that your mortgage application might be denied, despite your income being up to par. This happens for various reasons.

Would you like to find out what these are and possibly avoid them? Check out our blog for insights.

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