Mortgage Rules Of Thumb: How Much House Can I Afford Rule Of Thumb

By: ROS Team

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Buying a home can be a once in a lifetime event for some. High earners may be able to afford more than one home, but it doesn’t mean that lenders will keep on approving your loan applications. On the contrary, mortgage lenders use qualification ratios to measure how much money they’re willing to loan to you.

The mortgage rules of thumb

Based on average qualification ratios, there are certain house affordability rules of thumb.

Mortgage Rule of Thumb

In the real estate market, a common rule of thumb is that lenders calculate how much one can borrow based on the person’s debt-to-income ratio. In other words, the debt-to-income ratio is someone’s total debts compared to their monthly or annual gross income.

Most of the time, lenders consider granting individuals loans if the loan amount is at least 28% of their gross income. Then there are other rules such as rule 32% or rule 40% which are collectively known as the ‘mortgage rules of thumb.’

If your requested loan amount exceeds any of these limits, your application will likely be declined. So if you know these rules, you can do simple math to figure out whether or not you would qualify for a loan for the amount requested. Doing this will help you save time and energy that you otherwise will waste if you wait on the bank to tell you the same thing.

Mortgage Rule of Thumb

Maximum Mortgage Payment — The 28% Rule

The 28% rule states that you should spend 28% or less of your pre-tax income on your mortgage payments.  This percentage includes the amount spent on interest.

For example, if your annual pre-tax income is $200,000, you can afford to spend around $56,000 annually on mortgage payments, which factor in both the loan principal and monthly interest.

The 28% / 36% Rule:

Another rule of thumb is the 28% / 36% rule. In this scenario, once you spend 28% on your mortgage payment you may still have an additional 8% of your income to pay on other debts like car payments or student loans.

If your monthly income is $10,000, you can afford to spend $2000 on your mortgage payment and still have $1800 left to pay towards other financial obligations.

It is quiet to use this rule to calculate how much money you can borrow for a home loan.

thumb of rule to buy a house

Maximum Total Housing Payment — The 32% Rule

The 32% rule covers all of your financial obligations, such as mortgage payments, homeowner’s insurance, property taxes, homeowner’s association fees, etc. The key is to ensure the total liability doesn’t exceed 32% per your monthly income.

If you are earning $5,000 per month, all of your mortgage-related expenses must not exceed $1,800.

Maximum total housing payment

Maximum Monthly Debt Payment — The 40% Rule

The 40% rule suggests that all of your loans, including house mortgage, student loan, car insurance, and credit card payments, shouldn’t exceed 40% of your monthly income.

Lenders review your financial status and usually do not grant a loan when all of your outstanding financial obligations exceed 40% of your monthly income. Before applying for the home loan, do some calculations to determine if you even qualify for the loan.

If your monthly income is $5,000, your total monthly debt payments should be $2,000 or less.

The 40% rule is most often used by lenders, although it may fluctuate between 40% and 50% given the lender.  Therefore, to help increase your chances of getting the loan, keep your other financial liabilities low.

The 2.5x Rule:

The 2.5x rule suggests that you only consider homes priced at 2.5 times your gross annual income. However, you’ll need to consider the local market for this rule to work. For example, if the average price of a home in your area is 5 times your average income then you need to have more money saved or you’ll need to make a bigger down payment for this rule to work.

The 2.5x rule

The 3x Rule:

According to this rule, you can apply for a loan amount that’s 3-times your annual income if you pay 20% of your income towards settling existing loans.

The 4x Rule:

If you do not have a large amount of debt to pay down and you spend less than 20% of your monthly income on bills, you may qualify for a home loan that equals up to 4-times your annual income.

If you don’t have significant outstanding financial liabilities, it is wise to save up to 20% for a down payment before applying for a home loan.

The 5x Rule:

It’s rare, but sometimes borrowers qualify for mortgages up to 5-times their annual income. This is usually the case for people who’ve paid off all major loans and are basically debt-free. However, it does not mean you should maximize and get a home loan for that amount. You can still apply for a smaller loan amount if you do not want to pay large mortgage installments.

different rules of thumb for buying

In Conclusion, How Much House Can you Afford?

To figure out how much house you can afford, get a basic understanding of the different rules of thumb for buying a house. Do some calculations on your own before applying for a home loan and crossing your fingers hoping you qualify for enough to get the house you want. Doing some basic calculations based on your annual income will help you avoid wasting precious time looking at houses you can’t afford.

If you feel you do not qualify, work on reducing your debt-to-income ratio so these rules don’t disqualify you.


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