Hey, Kyle here with
winthehouseyoulove.com. Today, we're talking about, if you
have a salary of $40,000 per year, how much house could you afford? Now there's an important distinction
to make here: it's how much you could, not how much you should. So how much could a lender approve
you for as a max purchase price? Now in past videos, I've shown
you how to do the math by hand. And what I did is actually put
together a Google Sheet for you that's going to auto calculate all of this. So the download for this
is in the description. All you have to do is follow along
with me and I'm gonna show you how much you can afford really with any
salary, but we're going to demonstrate $40,000 a year, how much you can afford. Again, this is could not should. So first we need to, when you download
this Google sheet or you copy it into your Google Drive, you'll have
to have a Google account to do this. What, we first want to do
is put in our gross income. All right. So I can put in $40,000
as our yearly income. Now, why do we use gross? Lenders use gross when they're
going to approve you on a loan. Now, when you're actually figuring out
how much is a comfortable mortgage payment for you, how much you should borrow,
then you're going to want to look at your net pay, your take home pay after taxes. That's going to help you figure
out what's comfortable for you. So this video is not about budgeting. This video is about how much a lender
could approve you for it's all based on what they're willing to give to you. Just because a lender is willing
to give it to you doesn't mean you should take it out. So we put in our yearly income. Now we're going to act like
we're just the only buyer or the only borrower on this loan. But if you had a co-borrower, so
maybe a spouse or a partner, or even a friend, you could put them here
and their yearly income as well. So across the top, we can see that
our combined monthly income, so $40,000 plus $0 is $3,333 per month. Now, again, that's gross. Over here, this is going to show us an
approximate of what our take home pay is. So assuming 20% in taxes our estimated
take home pay is $2,667 per month. All right. So after that, what we want to do
is we want to put in our debts. So I have 10 slots in here for debts,
which hopefully should be enough to cover what you have, but in the
debt section, we want to go ahead and start listing out what we have. So let's say we have a car payment. Let's say the car payment is $350. All right. Let's also say we have, let's
do, yeah, let's do student loan. Let's say our student loan is at $250. Okay. And let's say maybe those are
the only debts we have, so you can see total $600 per month. And then up here, we can see
again, total monthly debts between both buyers, which is ourself and
no one else is $600 per month. So we have $600 a month in debt,
$3,333 in gross monthly income. So the first thing a lender is going
to figure out is how much you can afford in your max monthly debt. All right. So, that number is determined
by what's called your max DTI. And we'll talk about these numbers here
in a second and how you can adjust them. But your max monthly debt is
basically how much a lender is willing to let you have in total debt. So your total monthly debts plus
your mortgage payment, and then you have your estimated housing payment. All right. So this is the max that a lender
will allow you to have, based on your maximum monthly debt and
your total monthly debts as well. All right. So keep following along with
me, I'll show you how this works with the debt to income ratio. So based on this scenario, what this
is saying is when we have $600 a month in debt, we can afford a max
housing payment of $833 per month. And that's actually 32%
of our take home pay. So this is going to help you give
you a good idea to see just because a lender will approve you for something
doesn't mean you necessarily should take it out because 32% is probably
a little bit high as far as using, you know, spending that much money,
32% of your take home pay on housing. And so, down here, this part of the
calculator is going to break down $833 into principal and interest, taxes,
insurance, homeowners association, and mortgage insurance costs as well for you. So you get to break down and see kind of
how these numbers are working together. And then it's going to reverse
calculate into an estimated max purchase price for you. So this is super powerful because
now you can actually begin playing with these numbers a little
bit and seeing what's going on. So let's see a couple of the
other things that are coming together to add this calculation. So first we have the down payment. So right now we're at 5%. Now, if you wanted to increase
your down payment, let's say you went from, you went up to 20%. Watch our max purchase price change. We can see, we actually increased
how much we could purchase because we put a higher down payment. Now, something else we can do is
change the interest rate, right? A 3% interest rate
affords us $132,000 house. A 5% interest rate. You can see, we drop how much we
can afford by almost $20,000, just by our interest rate changing. Now, this is a great
segue into our sponsor. So really one of the best ways to
figure out a good interest rate for you and your family is to shop for
interest rates and, our sponsor, Credible, what they do is they're,
they're a loan comparison website. And what you can do is go to their
website, fill out a prequalification form. And what they'll do is they'll show
you prequalifed rates from different lenders so you can compare, which
is going to be the best for you. It really only takes a few
minutes, and it's going to not affect your credit score at all. It's going to be a soft pull, so it's
not going to impact your credit score. So if you want to learn more about
what rates you can qualify for you can go to the link in the description
to go to Credible's website and fill out a prequalification request. For full disclosure Credible does pay Win
The House You Love an advertising fee when you fill out a prequalification request. That's Credible Operations, Inc. NMLS 1681276, not available in all States. Okay. So now that we have our interest rate
figured out we're going to put in 3% here. We can then put in our tax rate. Now I put in these estimates for taxes
and insurance, and you'll see that the tax rate directly affects the taxes and
the insurance rate affects the insurance. So for instance, if we wanted to
move up to a 2% tax rate, we can see this changes the max purchase price,
because our taxes increased, meaning that we could afford less house. So if you're not sure what these are
in your area, then you can leave them. These are going to be good approximations
for you to just get started. The whole idea of this calculator
is to get a ballpark for you. Then you can put in yearly HOA, now around
my area, there's really not a ton of HOAs, so I put zero, but maybe you have
an HOA that's $500 a year and you can see that's going to change again, how much
you can purchase by about $6,000, because you increased your monthly payment, oops,
$500, you increased your monthly payment, meaning you can afford less house. Alright. Now you also have mortgage
insurance as an option in here. If you hover over, it's going to
show you a little card, if you know, what type of loan you're using
and what you can enter in here. So if you're putting less than
20% down, a good approximation for mortgage insurance is going to be .006. And that's going to jump, fill
this cell in right over here. You can also put in the years. So this is kind of interesting. So a 30 year loan, we can afford
$132,000 house, now on a 15 year loan keeping the payment the same. We can only afford a $94,000 house. So it's something to kind of keep
in mind, and can be interesting for you to play around with and see how
much you can afford depending on all of these different, scenarios here. Now the most crucial thing about this
calculator is the debt to income ratio. So debt to income ratio is just how
much debt do you have compared by a divided by how much income you have? So there's actually two ratios. The first one is your housing payment. How much is your total mortgage
payment divided by your income? And the next is your housing payment
plus debt divided by your income. So this housing debt to income ratio
is going to be listed in a percentage. So a conservative number is 28%. That means 28% of your gross pay would
be going towards the housing payment. If you want to go moderate,
you can bring that up to 36%. If you want to go aggressive,
you can bring that up to 45%. Now, as far as the max DTI, again,
this is going to be your total debt. So your potential mortgage plus all
of your debts divided by your income. So a conservative number here is 36%. Moderate is going to be 43%. Aggressive is 49% and in my
mind, dangerous gets up to 55%. Now a lender actually will approve
you for this amount and I'll show you how dangerous this can be. So let's run through a
couple scenarios, right? So we can see right now with our current,
our current debts that we have, we could afford $132,000 house with 5% down. Now, again, if you're in a high
cost area, obviously you're probably making more than $40,000. If you're looking to purchase a home
that is so much more expensive, but for instance, in the local market around
here, this is a very common scenario. Someone with a $40,000 income
purchasing $132,000 house. Okay. Let's say we were doing an FHA loan. Well, an FHA loan, a lender will actually
approve up to a 55% debt to income ratio. And about 36% on the
front end housing ratio. And then we'll put in FHA's mortgage
insurance number in here as well. So we can see on an FHA program, we
can actually afford quite a bit more, than with a more conservative approach. Okay. Now also what would happen if we paid
off student loans or let's say we just didn't have student loans so we can see
nothing changes too much here because we've already maxed out our monthly debt. Alright. So, let's see, move this back and
let's say we're actually going to go up to, let's say we're going
to do a conventional loan program. Conventional loans normally
have a 49% backend DTI. And technically don't have a front
end DTI so we can move this actually up to 49% if we wanted to or 45%, if
we're going to be more conservative on a conventional program and I'm going
to readjust our mortgage insurance. So you can see on a conventional
program, if we had a high credit score, you could actually technically
afford up to a $239,000 house on a $40,000 per year income. All right. And what's crazy about this is this
is a 57% of your take home pay, right? So you can see this up here in this box. 57% of your take home pay could
go to a housing payment and a lender would approve you for that
amount in certain circumstances, if you had a high credit score. So you had to be very careful. Just because a lender is going
to give you money doesn't mean that you should take it. So the best thing that you can
do here really is to just start playing around with these numbers. So you can get a better
feeling for affordability. So again, if we put back in these debts
and we said, we had a car payment here, student loans, and then let's say we
add a co-borrower on here and I'm going to kind of drop this back down to being
something a little bit more reasonable, something that might be a little bit
more, a little nicer in our budget here. So let's say, we added a co-borrower. Let's say they make
$40,000 a year as well. All right. Maybe, maybe all they have is a
credit card and it's $150 per month. So we can see with a co-borrower. We now are paying, or we now can afford
up to a $297,000 house with 5% down. And that would be 35%
of our take home pay. So just to kind of recap, this
is only covering what you could get approved for by a lender. This is just to give you a ballpark
idea of how these numbers work and how these ratios and different things
come into play because right, if you want to do a 15 year loan, well, it's
going to change how much you can afford by almost $80,000 in purchase price. So it's really interesting to be able to
play around with this and see what works. Try it out. Let me know if you have any questions,
but the calculator is down below for you. Okay. Again, only take out a loan for
what's going to be comfortable for you to pay back in your budget.
