You will need a basic calculator for this. The one on your phone is totally fine.
In a perfect world you would talk to a great, amazing mortgage originator upfront. However, we all know that is not realistic and if you are like me you want to crunch the numbers first to get a rough idea before you talk to anyone. The below 7 step calculation is a basic guide. If you are self-employed, commission or pay alimony and child support the below will not work accurately for you. This is really for salary employees or employees who work 40 hours a week every week without fail. This is math heavy but really easy and you can do it! These basic calculations will serve you for your entire life so learn them and whip them out when you are seeing if you can afford a new car payment etc…
7 Steps Mortgage Affordability
- Get all your credit card, personal loans, student loans** and car payment bills. Basically, any bill that shows up on your credit report grab that. Write down the minimum payment for each one. Add up all the minimum payments and write it down. You are going to need this in step 6.
2. For Salary employees take your gross (pretax) salary and divide it by 12. This number represents your monthly gross income. Write it down. For example: Salary $120,000 divided by 12 = $10,000
If you are hourly do your hourly rate times 40, times 52, and then divide by 12. This is your monthly gross income. Write it down. If you do not ALWAYS work 40 hours a week this calculation does not work. Do not add your overtime into this. You want to try to qualify without using overtime because overtime is not guaranteed. A lender can use overtime to help you qualify but in a perfect world that is just “gravy.”
3. Take your monthly gross income X .30. Then take your monthly gross income X.43. Write both these numbers down.
For example: at $10,000 a month gross X .30 = $3,000
Ideally you want your housing payment to be no more then 30% of your gross income so in this example you would want to keep you total monthly housing payment under $3,000 as that is 30% of you $10,000 monthly salary. This is ideal for your long-term savings and retirement planning however it is not necessary by a mortgage lender. This is not realistic in every housing market which is why you are also doing .43. 43% of your gross income is around the max a lender will allow your monthly housing payment to be. Write down both your 43% number and 30% number. For fun see what percentage of your income your current rent is. If you rent is $5000 and your income is $10,000, your rent is 50% of your gross income. That is not good! The calculation is: Rent divided by gross monthly income= % of monthly income.
4. Now that you have determined your 43% number and 30% number use a mortgage calculator to figure out the total monthly payment for the price point of houses you are looking at. Here is a link to my free app that will give you up to the minute rates as well as a very nifty mortgage calculator.
Make sure you fill out the advanced fields such as property tax %, estimated monthly homeowners’ insurance and if you are putting down lees then 20% click YES on mortgage insurance. All these numbers are what makes your total monthly payment. You have to do the “whole ball of wax.” Condo? Make sure you include the HOA fees. An important note on the app is that it does not show everything we have available in terms of rates and products. We may have lower rates and other products. For jumbo loans it really only does the very traditional ones. For more options call me at 707-478-0637. We have such a variety of options the tech is not up to where an actual person is yet. It will say there are no options but trust there are. The app really is worth downloading. It literally gives you rates that are up to the minute. It is like having me in your pocket unless you are a jumbo buyer.
5. OK now that you have seen your estimated payment for the houses you like does the total monthly payment fit in at 30% or 43% or somewhere below 43%? If below 43% move onto next step. If above 43% play with the calculator until you find a purchase price that gives you a total payment under 43%. Write down your projected housing payment.
6. Now you are going to add up the projected housing payment + the minimum monthly payments you came up with in step one. Now take that total number and divide it by your monthly gross income. What do you get?
7. If you are under 43% with both numbers added that is great! We do have a lot of loans that can go up to 50% so if you are under 50 you are still in the running. Over 50? You can go over 50 with FHA and VA but honestly over 50 and you are going to be “house poor.” Not sure what House poor is? Check out this video. I was house poor once and it Sucked. Rude word but seriously that is the nicest word I can use to describe it.
Have questions? As always call me or email me.
All my best,
**If your student loans are deferred, lenders will hit you with a monthly payment for them even though you do not have a payment 9 out of 10 times. Depending on the loan program it can be as much as 1% of the balance. For example, if you have $30,000 in student loans that is $300 a month payment. This varies based on program and types of loans you have so please chat with a lender to confirm. To be cautious I would calculate at 1%.