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I’m curious as to what mortgage amounts are recommended in relation to annual gross income.
Every situation is different, but as a general rule of thumb, I would recommend purchasing a home that costs no more than 2.5 times a buyer’s annual gross income. For example, I wouldn’t recommend a couple with an annual gross of $100,000 purchasing a home more than $250,000.
I know that would put many people that are just buying in areas with a high cost of living in less than desired areas.
So, if you don’t mind me asking, what was your home cost in relation to your annual gross income when you purchased your home? 2, 2.5, 4? If you purchased it, and then a year or two later your income changed for the majority of your payment schedule, use that figure.
My wife and I are renting, but we are looking to purchase about a year from now when I should be done with school and have a job. We would be looking for a home no more than 2.3 times our annual gross, with 2 times being preferred.
Fannie Mae's guidelines are 28/36. For example: Monthly Gross Salary is
1000.00.
You would multiply 1000 by 28% = 280
This number will be the HIGHEST you should look to pay in a 'mortgage payment' (payment includes principal, interest, taxes, insurance, PMI)
36 is used to add up ALL of your debt plus the mortgage payment.
$360.00 will include any debts that is being reported on your credit report.
Some lenders may go up to 40/65%, but you have to remember that this is GROSS income...not net income. Which makes it worse.
When I purchased my home I limited myself to a value of twice my annual income. The bank pre-approved me for more, but as a single person with only one income coming into the household, and this being my first home, I decided to be pretty conservative. I think I made a good decision, the house has gone up substantially in value, I have solid equity, and the loan was FHA fixed-rate that is also assumable.
We also did a budget with the lowest income we could afford a mortgage. We took 15% of my husband's current salary & figured out what we would need in order to pay a mortgage & bills based on that amount.
While right now we can afford a certain amount, there is no guarantee it will stay this way. Could go up or could go down. We based our budget on worst case scenario.
So, we found a home that was a little under what we could pay but at the same time was manageable if income did change. We long ago gave up the desire for a huge home with all the bells & whistles. We are just excited we are on the way to becoming homeowners in a great little house with a beautiful backyard & in a great neighborhood. It needs updating but is move in ready. Over time, we can update.
We just know we can AFFORD the payments & that is peace of mind.
We are doing the 28/36 guideline but our mortgage payment is about $75 less/month than the highest we should go...there was NO way we were going to top out...too risky.
We are looking at homes right now about 3.3x our gross income. I know that's higher than recommended but we've analyzed our budget carefully. We can still afford the mortgage, our car payment, our student loan payment, our monthly bills, 1 exotic vacation a year, several flights to visit family, fund our 401ks, and add about 12% of our net income to our rainy day fund. Our rainy day fund includes 20 months of PITI payments so we could always dip (reluctantly) into that for emergencies.
For those of you that use a much lower ratio- what do you do with the rest of your money? If you're financially prudent enough to follow a low income guideline, I assume you probably don't have big car payments, crazy credit card debt, etc.
I am single and purchased a home at was about 2.5 times my annual income. I put 20% down and have rainy day fund, no car payment, no credit card debt. It's pretty conservative.
We are looking at homes right now about 3.3x our gross income. I know that's higher than recommended but we've analyzed our budget carefully. We can still afford the mortgage, our car payment, our student loan payment, our monthly bills, 1 exotic vacation a year, several flights to visit family, fund our 401ks, and add about 12% of our net income to our rainy day fund. Our rainy day fund includes 20 months of PITI payments so we could always dip (reluctantly) into that for emergencies.
For those of you that use a much lower ratio- what do you do with the rest of your money? If you're financially prudent enough to follow a low income guideline, I assume you probably don't have big car payments, crazy credit card debt, etc.
We have children...that is probably the cost times a few of your exotic vacation
One income. I am a stay at home mom.
We have 2 car payments that are not that high but still there to remind us we have car payments.
Absolutely no credit card debt.
We put money into a 401k, rainy day, car repairs, home repairs, savings, & the kicker...we will be sending our children to private school starting in K -12 & that is a nice chunk of change to save.
Absolutely no desire to own the biggest house on the block. We'd rather have a nice mortgage & save more for retirement, college funds & vacations.
I'll be applying for a mortgage in the summer and I gross 52,000 a year. My husband makes 41,000 but will not be on the mortgage because his debt is bad and the creditors won't work with him on a plan and I won't risk having a lien put on the house. If I want anything decent, I will need at least 250,000 with 10,000 down to get anyting habitable in New Jersey. Thankfully, my credit card payments are a joke in as little as 200.00 a month for all 4 and my car is payed off. Hopefully when my score goes up by then I will get a good rate.
We looked at some million+ dollar tract homes just last weekend in Orange County, CA
It's hard to fathom how anyone could stay within those guidelines if trying to buy at current RE prices there.
For example a quick search of Mission Viejo and Rancho Santa Margarita (actually on the affordable side as OC goes) might get your $100,000 a year couple into a 1 bedroom 1 bath condo or townhouse in the 450 - 800 sq ft range. No single family homes came up for $250,000 or less at all.
Yet as far as I can tell, the average household income in the county is actually below your $100,000 number.
Go figure.
We have pushed the envelope getting into a house in the past, but we've always been within your suggested 2.5 ratio or better within 2-3 years. Sometimes that first year or two has been darn tight financially though!
I’m curious as to what mortgage amounts are recommended in relation to annual gross income.
Every situation is different, but as a general rule of thumb, I would recommend purchasing a home that costs no more than 2.5 times a buyer’s annual gross income. For example, I wouldn’t recommend a couple with an annual gross of $100,000 purchasing a home more than $250,000.
I know that would put many people that are just buying in areas with a high cost of living in less than desired areas.
So, if you don’t mind me asking, what was your home cost in relation to your annual gross income when you purchased your home? 2, 2.5, 4? If you purchased it, and then a year or two later your income changed for the majority of your payment schedule, use that figure.
My wife and I are renting, but we are looking to purchase about a year from now when I should be done with school and have a job. We would be looking for a home no more than 2.3 times our annual gross, with 2 times being preferred.
Thanks for any responses!
You have to take your downpayment into account. You can have a couple making $100K a year, trading up, but walking away with $150K equity to roll into the next home - so they can afford more than $250K. I would say with the average downpayment - 2.5 or below is ideal.
The first house I purchased was 2.3x annual income with 10% down.
2nd house was 2.1x annual income with 30% down.
3rd house was about 2.3x annual income with 25% down. Today our mortgage amount is 1.2x annual income, which is so nice and why I won't upgrade.
I'm in a very high COL area so we started off small, and worked our way up. We were approved for amounts much higher, but I like sleeping at night.
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