Can You Actually Afford a $400,000 Home?

have you ever been on Zillow and just start browsing houses and then just immediately get slapped in the face with all how expensive freaking houses are now according to Motley Fool the median home sales price in the first quarter of 2023 was 436 thousand and eight hundred dollars so now that homeownership is as unobtainable as it is for me to receive my dad's love and affection and respect in this video we're going to break down if you can actually afford a home for 400 000 this means we're going to break down what the budget should look like how much money you need to be making how much is it going to cost out of your pocket and overall if you pass the general Vibe check to see if you are worthy to buy a 400 000 home I know it sounds like really brutal but so first let's break down what a mortgage payment will look like a mortgage payment has five different factors there's your principal there's your interest there is your hazard Insurance there's your taxes and there is your mortgage insurance now out of these five things there are two things we we can safely predict for every single situation and that is your principal and interest now with the remaining three two of them can kind of be predicted a little bit and that would be your mortgage insurance and your hazard insurance now there's some states out there like Florida that are in a crazy situation where home insurance is like going crazy high so we're not considering that but for home insurance we're going to use an average of about two thousand dollars a year for their premium so we're going to divide that by 12 and obviously that's going to be our number we're going to include in our payment and for our mortgage insurance obviously this varies if you put 20 down this is going to be zero or if you're buying a house with a conventional financing and you have really great credit this might be only 20 40 50 60 bucks it will be very minimal but if you're buying like with FHA or with a lower down payment or your credit isn't as great you might see this number being a hundred to two hundred dollars so just to be safe we're going to put 100 but consider those things if you're doing your own calculations so this leaves our taxes so what we're going to do for our taxes is we're going to basically break down three we're gonna break down a low tax state a medium fact stay in a high tax state so for our low we're gonna do two thousand for a medium we're gonna use four thousand for our high we're going to use six thousand yes can you believe it there are states out there that charge over five thousand dollars a year just for property taxes a moment of silence for everyone that lives in those States all right so now what we're going to do is let's figure out our principle and interest now you can find this number on any mortgage calculator what I highly recommend you do you because you're a smart person I'm not the smartest person and I figured out how to do this so you can definitely figure it out you can actually make your own mortgage check later on any Excel sheet you're gonna have to learn a little you're gonna have to Google a little but I would highly recommend you do this instead because you it gets you get to get a really good understanding of the numbers you can create your own amortization schedule so you can see how much interest you pay over like the life of the loan you can get really in depth now if you don't want to do it I do have a patreon that has this already made for you that you can definitely use and build from that point on but really take the time to learn it I think you're going to be really grateful so for a 400 000 house with a five percent down conventional loan for three percent that principal and interest looks like one thousand six hundred and two dollars with 10 cents at five percent mortgage it's gonna be two thousand thirty nine dollars and ninety two cents at seven percent of Interest we're gonna pay 2500 28 and 15 cents at nine percent we're paying 3057 and 57 cents why did I put nine percent interest I hope that that never it never gets to that point but these videos tend to live a very long time and I really hope that whoever's watching this in the future is not using that I'm just including it in there it's also kind of depressing to see how low the payments were at three percent and it really puts things in perspective right like when interest rates were like at two or three percent during the pandemic it made sense why a lot of people were buying because they were buying houses that normally they wouldn't be able to afford but anyways back to it so now what we're gonna do is we're going to our averages that we've discussed for our mortgage insurance we're going to do a hundred dollars a month for our home insurance we're going to do about a 2 000 annual so about 166 and 67 cents a month and we're going to calculate different scenarios based on the property taxes so I created this little quick sheet or cheat sheet to help us we can see here and we can kind of get a good idea of what your situation looks like so for make me an example I live in Phoenix Arizona we tend to be in a low tax state at seven percent interest we're going to have a monthly payment of 21 29 61 and 48 cents now of course these numbers here are assuming that the mortgage insurance is 100 and assuming that their Hazard insurance is 166. so just let's just use this for educational purposes now if you're in a high property state tax Maybe it's a little less affordable for you to afford a home which is insane I am sorry so for the purpose of this video we're going to do seven percent at medium tax rate just to get a good General Vibe which means it's 3128 and 15 cents we could do the three percent or five percent but that's just not what's happening right now and I hope one day that is happening and we're all living in Harmony and life is great so now we have a great understanding of what goes into a mortgage payment let's talk about the actual budget for this video we're going to use the 50 30 20 rule the 50 30 20 rule is a popular budgeting method that splits your monthly income into three main categories fifty percent of your income goes to needs like housing food Transportation basic utilities loan payments thirty percent goes your wants which is your monthly subscriptions your travel entertainment meals and 20 goes towards your savings and debt in addition to the 50 30 20 rule we're also going to incorporate our mortgage rule which we want to try to have a mortgage payment be under 30 of our monthly income so to figure out our budget I used a very basic budgeting template I just literally created this hopefully you guys have something similar to this that you actually track a little more I also pulled these numbers just from a general idea of what these numbers look like based on a bunch of sheets I've looked at online you could laugh and say oh my God 400 for utility I only pay 150 well you know there's maybe some areas there more or less so just use this for educational purposes no obviously the biggest thing that pops up here is that mortgage payment because in this example we're using 31 28 and 15 cents so now we can already tell the total is 54.73 which is really scary because if we look at that we say okay get this number multiply it by 12. that's like already 65k a year you have to make just to make the actual just barely get by and of course this is with no savings so if we incorporate like a minimum saving like a thousand dollars or something then this just makes everything go crazy right so this is just living by this skin of our teeth so how does it look like to actually be able to live this comfortably well like we said earlier the rule of thought is we're trying to keep this mortgage payment under 30 percent of our net income so we are not house poor so if we're trying to keep this under 30 of our net income then all we can do is work our way we do some like reverse math to figure out what that net income should look like to live comfortably so if x equals the amount that we need to be making and that and 3128 and 15 says is 30 of that number X multiplied by Point Thirty or thirty percent equals 3128 and 15 cents taking us back to high school algebra we divide um the number away from X and that means we divide 3128 and 15 cents by point to 30. that number is 10 427.17 in order for you to live comfortably in this house you need to be making ten thousand four hundred and twenty seven dollars and Seventeen cents a month now looking back at the screen you can see it does put us in a fairly good position um because we can save you know it's essentially four to five k and of course this is very Bare Bones you can definitely take on more subscriptions and stuff like that um and hopefully but if you keep those Bare Bones you have a bunch of money still to save a month you can save up to five thousand four thousand dollars a month or you can build on your your retirement et cetera et cetera but having the 30 or that mortgage would be 30 is really helpful and frees a lot of things up so how much does it look like to make annually if you're netting ten thousand four hundred and twenty seven dollars well we can that's our net income not our gross income if we're assuming your net income is 75 of your gross income which to get that we would do 10 427 and 17 cents we divide that by 0.75 and that gives us about thirteen thousand nine hundred and two so that would be your gross monthly income you need to be making that much money a month on your salary like not necessarily take home pay because that's different so your annual income on paper should look like 106 sixty six thousand dollars with our average income being like between fifty thousand to eighty thousand dollars this is completely insane in order for you to be able to afford comfortably your house you would have to be basically making big baller money already like over six figures that's like a great goal for a lot all of us to have to be in this position the reality is most people aren't making this much money and they're still buying now there's a lot to say here but before we move on there let's just quickly talk about the cost to get into a house at 400k it would be five percent down which would be approximately twenty thousand dollars average closing cost would be about ten thousand maybe add another one or two k for inspections appraisal your out-of-pocket cost should be thirty to thirty five thousand dollars if you're putting five percent down and anything more than you add on the down payment on top of that of course we'll add how much money you're gonna have to come up with and of course if you can get the seller to pay any of those closing costs that will reduce anything so that'll give you an idea of what you need to pay so obviously we're talking about the best case scenario here like the reality of the situation is I doubt most people are that are buying a 400 000 house are making a hundred and sixty six thousand dollars annually this is the absolute best case scenario but it kind of sets things up a little weirdly right like if all these people are buying 400k houses and they're not making 166 A year well how does their budget look like well you know I think it looks a lot tighter here's the thing you what you qualify for is different than what you can afford what you qualify for is quite simply just fifty percent of your gross monthly income at relatively low let's say you have no debt your the monthly payment you need to qualify for is 3 200 a month if we double that that's sixty four hundred dollars a month so if you're making approximately six to seven K and you have low debt you could technically qualify for a house and at seven thousand dollars a month I mean I guess it works but it just makes things very tight so not more than ever like I'm not I'm not here to discourage you home ownership should be something you would obtain for because not not for financial reasons not for it's a great investment you're going to make your money back baloney real estate is no longer a strong solid investment it is now something you're doing for your own personal goals you want to own a piece of property you want to be able to say I own this as I own a part of the United States of America me I own where I live I don't have a landlord and this is something that's important to me like you have to have other reasons now other than real estate and investment if this video scared you good it should feel scary you should be looking deep into your finances you should be looking into your budget to see what works because if those numbers don't work for you the lender's saying hey guess what bud you qualify for 420k you're just like yeah but you didn't do any of the research to figure out what you should actually afford you need to go back you need to start doing a deep Dives a great place to start is a video I recently made talking about what you can actually afford if you make fifty thousand dollars a year so go check that video out now let me know what you think see you guys in the next video

Channel: Javier Vidana

Views: 101,247

Keywords: how much home can you afford, mortgage, mortgage rules, renting rules, home buying, buying a house, renting a home, 30 30 3 rule, affordability housing, housing affordability rule, calculate housing affordability, annual salary, 50k, $50000, $400k, $400000, real estate, first time home buyer

Id: 6_XaYAvlb9M

Length: 11min 38sec (698 seconds)

Published: Tue Jul 18 2023