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How much home can you afford given a certain income? How about if your credit score isn’t the best? How about with extra debt obligations? Let me break things down for you and give a simple way to calculate how much you can afford. .

If you’ve been saving up for a down payment on a home you might be wondering what the maximum home price you can comfortably afford now today i’m going to cover what that is the median household income is about 50 k so i’m going to use this as an example to figure out how much the median income household family can afford basically for a median household income

You can just multiply it by five and you’ll get 250 k and that is the mortgage that you can afford most of these calculations you’re just working backwards from how much income you have basically you look at how much income you have you have set a certain ratio and that is the amount that you should be able to pay into your mortgage every month a typical set

Of criteria for a certain lender will actually make the calculation very very easy for example if you have someone that has a 700 credit score or above you’re going to get an interest rate of about 4% this is for 2016 if the interest rate changes in the future you just kind of modify a little bit and then you can do a simple calculation as well it just won’t be

Five it’s assumed you’re getting a 30-year fixed mortgage and that you’re paying 20% down payment on it so if you have a typical set of criteria right here you’re pretty good with your credit but not super excellent but you’ve been saving up your down payment and you have roughly 20% this is a way to figure out how much home you can afford you take your income i’m

Just going to use 50,000 because that’s a median u.s. household income you multiply it by five that’s really easy you can just do that in your head and you get 250 k this is roughly the number that you’ll get if you do all the math over here using the long way so you can just multiply by five and then you get your mortgage to 150 k of mortgage that’s just how much

You owe the bank but on top of that you probably paid a down payment so then this is about 80% of it so we got a back calculate about 24% 20% of this whole thing is sixty-two thousand five hundred dollars this is the amount that you need in order to buy the house with the down payment and you need maybe about about six thousand dollars in closing costs or so for

Something like this just add two hundred fifty k 262 k and 312 k is the whole price that you can afford if you have a $50,000 income now in the bay area of california you can’t really buy much with 312 k you can’t even buy an apartment you might be able to buy like a manufactured home or something like that with this amount so if you make this much in a bay area

It’s going to be really hard for you to buy any decent place but if you make double this at 100k then you can afford something double this which is 624 k still in the bay area of california the houses around here starts at 500 k and they go all the way up to millions but even if you make twice this amount you can only feel for 624 k the houses in the bay area starts

Around 500 k so if you have a budget of around 600 24 k you cannot still only buy like a very basic introductory home i know this looks a little simple but i’m going to jump one level deeper to show you that this number is actually pretty correct for this set of criteria over here now let’s start with a back end ratio the bank does not really want you to spend all

Your money on the mortgage because you need some to live on you need something to paid car payments credit card payments go on vacation etc so they set this ratio at 28% so if you make $50,000 a year 28% of that is $14,000 if you divide this by 12 you get one thousand one hundred sixty six dollars which is the amount they want you to use on a mortgage the maximum

Amount now this maximum amount is not set in stone and you can push it a little harder but if you push it a little harder it’s going to be harder and harder to get a mortgage you need a credit score of 700 in order to get an interest rate of 4% and if you have something higher you’re still going to get around 4% as you can see here the worse a credit score you get

The higher interest rate gets now if you’re interested in improving your credit score i have a whole bunch of other videos in my advanced finance playlist that you can look over in order to improve your credit score now let’s just say you have a credit score of 700 and above and you get an interest rate of 4% for a mortgage of $250,000 you can see here the payment

Is 1194 this is strangely very close how much you can afford so it does work out you can see here for a person with the worst credit score they have to pay more for the same two hundred fifty thousand dollar mortgage of course i didn’t add the hoa cost and the property taxes if you want something down to the dollar yes you can go and figure that out but this is

A great way you just go fifty thousand dollars multiplied by five if you know your credit score is in this range and also that you know you’re saving up twenty percent for the down payment it’s a great way to do mental calculation of how much you can actually afford a home it’s important to know that even though you’re getting a pretty good rate at four percent

Here by the time you’re done paying your mortgage you’re going to be paying about one hundred eighty thousand dollars on top of this two hundred fifty thousand dollar mortgage by the time you’re done so it’s quite hefty and if you have a worst credit score you screwed over here you’re going to end up paying about roughly 100 percent or you borrow two hundred

Fifty k you have to pay back 250 k and on top of that you got to pay another 250 k in interest i do have to note that taking 28% of your take-home pay in order to pay your mortgage it’s quite burdensome it’s going to feel pretty heavy in the beginning but it gets better and better because inflation goes up your income goes up if your career path code gets better

And better you’re going to make more and more money therefore as a years goes past your fixed payment per month it’s going to stay the same so it’s going to feel smaller and smaller as a years goes on so in this sense it might be okay to stretch a little bit because it’s going to feel less impactful in the future because the payment will seem smaller and smaller

Compared to your total income the other ratio that the banks are concerned with is the front end ratio they don’t want you to have too many debts so that you can’t afford to pay the mortgage that is set around 36% of your total income so if you multiply this out it’s about 18,000 divided by 12 it’s about $1,500 a month now this is the amount that you can afford

To pay the mortgage and all your other depth obligations they don’t want you to exceed this therefore you can have about three hundred thirty-four dollars worth of other kinds of debts and then you’ll still have eleven hundred sixty six dollars left over for your mortgage payments so if you have debt payments under $334 your front end ratio is not going to affect

Your mortgage your minimum credit payment that you need to pay your student loans your child support if you have any of those and car payments you add all those up every single month you have to pay this much those are your obligations and it must not exceed three hundred thirty-four dollars this front end ratio it’s also not set in stone you can push it a little

Harder forty three percent fifty percent is probably the most you would ever want to go and this is very super aggressive already you don’t want to push it too hard because they create an extra burden on yourself and create a lot of stress if you’re trying to make ends meet to make the mortgage payment so i hope that was useful if you have a different income for

Example twice as much you can just scale the final number by twice as much if you have a different credit score then you would have to take the monthly payment for that credit score and scale that accordingly as well this is beat the bush don’t forget to give me a like over here comment down below let me know if this helps and don’t forget to subscribe over here thanks for watching

Transcribed from video

How Much Home Can You Afford | BeatTheBush By BeatTheBush