- BUYING RESOURCES -

What can you really afford?






Determine how much home you can afford, including a down payment and closing costs.





- HOW MUCH CAN YOU AFFORD? -


BASED ON YOUR ANNUAL SALARY

Some experts suggest a spending limit of three times your salary for a home (if your income is $60,000, look for homes around $180,000). Other experts suggest only two times your salary.

This can be tough to accomplish in todays market. According to the BLS, the median salary in 2022 was just over $54,000. HUD says the median home price was $468,000 at the end of 2022 (it was $327,000 at the end of 2019). Obviously there is a disconnect here.

YELLOW SAYS...

Be careful combining finances with another person to buy a home.

It’s not uncommon to see a breakdown in the relationship and one person may leave. Can your lifestyle be afforded on one income?


For a different look at what you can afford, determine what monthly payment you could safely handle.


BASED ON MONTHLY PAYMENTS

Another way to look at what you can afford is the monthly payment. Your home payment should be around 25% of your take home pay (that means after taxes, too).

An income of $60,000 would bring you roughly $4000 a month in take-home pay (give or take with taxes). At 25%, your monthly payment would be around $1000. That means you can afford a home around $150,000.

There's a lot of variability in those numbers, so try different calculators to give you a good range to consider.


DEBT-TO-EXPENSES RATIOS

When you apply for a mortgage, the lender will look at your monthly income and compare it to the monthly cost of the home and all your other debts.

There are two main ratios lenders look at: Housing Expense Ratio and Debt-To-Income Ratio.


HOUSING EXPENSE RATIO
Compares housing expenses to pre-tax income

Most traditional lenders want a ratio under 28%, but loans backed by Fannie Mae and Freddie Mac will accept a ratio as high as 31%.


HOUSING EXPENSE RATIO

PRE-TAX MONTHLY INCOME
COST OF HOUSING PAYMENT

Take your monthly PRE-tax income and divide it by the cost of the housing payment. In the housing payment amount, be sure to include taxes, insurance, association fees, and PMI.

Goal: Under 28%.


Calculate your housing expense ratio here:


DEBT TO INCOME RATIO
Compares housing expenses AND other monthly expenses to pre-tax income

Most traditional lenders want a ratio under 36%, but loans backed by Fannie Mae and Freddie Mac will accept a ratio as high as 43%.


DEBT TO INCOME RATIO

PRE-TAX MONTHLY INCOME
COST OF HOUSING PAYMENT + OTHER MONTHLY DEBT

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 will give you a specific number for what you can afford. It comes from a lender who does a quick analysis of your finances.

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 ideally want a down payment of at least 20% of the home’s sale price. However, its possible to go as low as 3% with some mortgage programs (and 0% with a VA loan). 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.

Also recognize that loans with less than 20% down will have additional costs like PMI. These mortgages can take longer to close and have a higher chance of not closing, so some sellers may be reluctant to sell to a buyer with a low down payment.

PMI costs can average $30-70 per month for every $100,000 borrowed.



CLOSING COSTS

One of the biggest mistakes homebuyers make is not budgeting for closing costs. These are extra costs like fees and taxes, inspections, appraisals, and surveys, and can average around 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 the closing costs you'll face.





ADDITIONAL RESOURCES






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