Buying a house is a significant step, and it can be exciting regardless of the stress that comes with checking new places. How much home you can afford is relative to the size and type of mortgage you qualify for, considering that your mortgage size depends on your total monthly income and expenses.
But I make $70,000 a year; how much house can I afford? You’ve probably asked yourself a similar question but find it challenging to develop a conclusive answer due to the many determining factors.
To determine a practical price range of the house you can afford, you’ll want to set realistic expectations and consider your finances, borrowing option, and the entire purchase cost.
If you plan to pursue your goal of becoming a homeowner, I’ll show you the smart way to shop for a home.
Why Does Affordability Matter?
Unless you’re financially stable enough to pay cash for a house, you’ll depend on a housing loan to cover your purchase expenses – and you’ll have to repay the loan for 15 or 30 years, depending on the terms you agree to.
Mortgage lenders – like other lenders – keep their risk low. Therefore, you’d have to complete an application and wait for approval, which will determine the size of your mortgage. Remember that your mortgage limit is dependent on factors like your debt-to-income ratio and credit score.
But before you accept a mortgage loan from any lender, you need to consider if the monthly repayment fee is an amount you can afford. Your finances will be significantly affected if you have to take out another loan to finance an existing loan, and that’s why you’ll want to understand the rules governing home affordability.
The Rules of Home Affordability
Mortgage lenders use qualification ratios to estimate the amount they’ll lend a borrower. The percentages for each lender slightly differ, but most are in the same range. Suppose you’re looking for a house you can afford with a $70,000 salary breakdown; you should consider these rules:
Your Maximum Mortgage Payment
Your monthly mortgage payment mustn’t exceed 28 percent of your total monthly gross income, and this is the golden rule that should determine how much home you can afford. So, if you plan to apply for a mortgage on a 70k salary, your monthly payment shouldn’t exceed $1,800.
Your Maximum Monthly Debt Payment
Ensure that your entire monthly debt, including credit card, auto insurance, housing, or student loan, doesn’t surpass 40 percent of your monthly earnings. Say you’re looking to buy a 300k house on a 75k salary, your monthly payment is $6,250, and debt payment claims about 60 percent of it. Your monthly mortgage payment will cap at an amount that’ll likely be inconvenient for you to repay.
The rule means that suppose you have a considerable amount of monthly debt payments, you won’t be able to afford much in mortgage payments. In most cases, financial institutions won’t approve your loan application unless you eliminate some debts.
Your Maximum Total Housing Payment
On a final note, the last rule dictates that your entire housing cost, including homeowners’ insurance, mortgage, private mortgage insurance, and property taxes, shouldn’t exceed 32 percent of your monthly income. Say you’re a couple looking to get a $70,000 income mortgage; your total housing cost shouldn’t surpass $1,750 monthly.
I Make $70,000 a Year, How Much House Can I Afford?
The following are practical tips to determine how much house you can afford based on your annual income:
1. Estimate Your Income
Moneylenders and financial institutions base mortgage approvals on the applicant’s gross monthly income, meaning your total pay before deductions and taxes.
So, you’d want to have a good once over with your finances to determine if you’ll have enough to finance your housing loan after debt repayments and still have some cash for the month. But can I buy a house with a 70k salary? Yes, depending on the cost of the house and the number of loans you’re financing.
2. Assess Your Debt
Besides your monthly pay, lenders would also like to be aware of any existing debt. Banks will most likely turn down your application if you’re financing a considerable amount of debt, ultimately killing your dream of owning a home soon. But if you wisely manage your dbt, it’ll present your finances well before money lenders and ease your monthly mortgage repayment.
3. Evaluate Your Monthly Spendings
When estimating a house you can afford, it’s vital to have a crystal view of your monthly spending. Your expenses depend on your family size and your spending habits. According to a Bureau of Labor Statistics study, an individual’s average monthly spending – including utilities – peaks at about $2,500.
So, if you earn $70,000 per annum and are prudent in your spending, you’d have enough to go through the month after the mortgage, considering you don’t have too many debts to finance.
4. Check Your Credit History
Lenders will evaluate your credit reports when you apply for a housing loan. Your credit report encompasses your credit history, including loans, balances, payment history, and credit card accounts.
Besides checking whether you’re prompt with bill payments, lenders will review how many of the available credits you actively use. Keeping your credit utilization rate beneath 30 percent improves your credit score and depicts that you manage your debts prudently.
5. Understand Mortgage Options
If you’ve carefully evaluated your finances, it’s time to know your financial standing regarding buying a home. But before you apply for a mortgage, you’d want to assess your loan options beforehand.
Homebuyers can opt for either primary mortgage plans – the conventional loan offered by private money lenders and banks or the government-funded mortgage plan.
Remember that buying a home is a critical decision, and it revolves mainly around your finances. Before settling for a mortgage plan, evaluate the rate and terms for each loan package and compare them with your finances to select a convenient option.
I make $70,000 a year; how much house can I afford? If you’ve been pondering on a similar question, this article provides you with the tips to arrive at a conclusive answer and crucial rules to guide your decisions. Remember, your goal is to buy a home you can conveniently finance based on your annual earnings, and employing these tips will positively affect your decisions.