- BUYING RESOURCES -
What can you really afford?
RESOURCES FOR:
Determine how much home you can afford, including a down payment and closing costs.
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- HOW MUCH CAN YOU AFFORD? -
There are several ways to calculate how much home you can afford. While we discuss various methods below, the easiest way is to contact a lender and get a preapproval. We’ll cover preapproval in more detail later.
AFFORDABILITY BASED ON YOUR ANNUAL SALARY
Some experts suggest you can afford a home priced at three times your annual salary (e.g., with an income of $60,000, look for homes around $180,000). Others recommend a more conservative approach of two times your salary. However, this can be challenging in today’s market.
According to the Bureau of Labor Statistics (BLS), the median salary in 2022 was just over $54,000, while the Department of Housing and Urban Development (HUD) reported the median home price was $468,000 at the end of 2022. This discrepancy means the average home cost is about 8.6 times the average salary, indicating a significant affordability gap.
YELLOW SAYS...
Be cautious when combining finances with another person to buy a home. If the relationship ends, can you afford the home on a single income?
Instead of only looking at your annual salary, consider what monthly payment you can safely handle.
BASED ON MONTHLY PAYMENTS
Another method to determine affordability is by considering the monthly payment. Your home payment should be around 25% of your take-home pay (after taxes).
An income of $60,000 translates to roughly $4,000 a month in take-home pay. At 25%, your monthly payment should be around $1,000, allowing you to afford a home priced around $150,000. Use various online calculators to refine these numbers:
DEBT-TO-EXPENSES RATIOS
When applying for a mortgage, lenders compare your monthly income to your monthly housing costs and other debts. We discuss the two primary ratios below.
HOUSING EXPENSE RATIO
Compares housing expenses to pre-tax income
Most traditional lenders prefer a ratio under 28%, while loans backed by Fannie Mae and Freddie Mac may accept up to 31%.
HOUSING EXPENSE RATIO
Take your monthly PRE-tax income and divide it by the cost of the housing payment. Include taxes, insurance, association fees, and PMI in the housing payment.
Goal: Under 28%.
DEBT TO INCOME RATIO
Compares housing expenses AND other monthly expenses to pre-tax income
Traditional lenders typically prefer a ratio under 36%, but Fannie Mae and Freddie Mac may accept up to 43%.
DEBT TO INCOME RATIO
Take your monthly PRE-tax income and divide it by the cost of a housing payment (including taxes, insurance, association fees, and PMI) PLUS other monthly debt payments like credit cards, car loans, student loans, and even child support.
Goal: Under 36%.
GET A PREAPPROVAL
A mortgage preapproval provides a specific figure for what you can afford, based on a quick analysis of your finances by a lender.
We'll have more on preapprovals in the next page.
ADDITIONAL RESOURCES
- START SAVING -
It's important to start saving early – not only for your down payment, but also for closing costs which can run between 2-5% of your loan amount.
DOWN PAYMENT
Lenders generally prefer a down payment of at least 20% of the home’s sale price. However, some mortgage programs allow down payments as low as 3% (and 0% for VA loans). Note that loans with less than 20% down require PMI, which can add $30-70 per month per $100,000 borrowed.
We'll discuss these more on the next page, but the important point now is to think about how much you must save for this down payment.
PMI costs can average $30-70 per month for every $100,000 borrowed.
CLOSING COSTS
Many homebuyers forget to budget for closing costs, which include fees, taxes, inspections, appraisals, and surveys. These costs typically average 2-5% of the purchase price.
YELLOW SAYS...
YELLOW provides a closing cost estimate for every home listed on YELLOW. Click the 'Cash to Close' link in the listing page to get a rough estimate of your closing costs.
ADDITIONAL RESOURCES
