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These days, monthly mortgage payments can fall between $1,500 and $2,000 for property priced between $267,000 and $345,000 at a 4% mortgage rate. Depending on where you live and your other financial obligations, paying this amount may be doable for someone with an annual salary of $70,000. But there’s much more to house affordability than how much money you have in the bank or earn in a year.
If you’re looking for ways that you can afford to buy a house, you may be able to afford more than the average potential homebuyer. In this article, we’ll break down property affordability and ways you can maximize your buying power.
Financial experts suggest that rent or mortgage payments should account for between 25% and 33%, or ⅓, of your monthly gross income. Before taxes and other withholdings, the average person who makes around $70,000 a year will take home around $5,800 each month.
Monthly mortgage payment of $1,450 would fall within this range because it’s 25% of the person’s take-home pay ($5,800). Using the ⅓ rule, the ideal monthly payment should be a little under $2,000. If you can afford to pay 40% of your gross income on mortgage payments, you could afford a $2,300 monthly mortgage payment.
It’s possible. Your mortgage payment shouldn’t exceed $1,692 each month if your annual salary is $70,000.
Recent studies and financial experts suggest housing costs should account for between 28% and 36% of your gross monthly income. With a salary of $70,000, the average take-home, or net, pay will be around $4,328 each month. Applying the 28% – 36% recommendation, it wouldn’t be a good idea to get a mortgage that required you to pay more than $1,442 a month. This amount includes your principal and interest, taxes, insurance, HOA fees (if applicable), and PMI or mortgage insurance.
Instead of focusing on the home’s sticker price, focus on whether or not you have the financial means to pay down the home loan.
Before we begin, let’s first determine your ideal monthly mortgage payment.
It’s estimated that the typical American family pays $2,375 in property taxes each year; that equates to around $198 per month. In addition, lenders often require insurance to cover your mortgage. Your lender may have special insurance requirements based on the population density of the area where the house is located and natural catastrophe risks like flooding.
You can request a price quote from an insurance provider so that you can determine whether the insurance premiums for the house are reasonable.
Residents’ associations with a private board of directors are known as homeowners’ associations (HOAs). HOAs establish a set of rules and regulations for residents to follow. According to HOA-USA, there are over 351,000 HOAs in place across the U.S. This means 53% of owner-occupied residences belong to an HOA. If you buy a property in one, your monthly association fees finance community upkeep, including landscaping and joint space development.
Depending on your community’s amenities, these fees could vary from hundreds of dollars to thousands annually. Before you close on your new house, find out whether you’ll be required to pay HOA fees.
The fees for private mortgage insurance (PMI) or simple mortgage insurance (for government loans like FHA and VA loans) are included in the mortgage total if you cannot afford to pay a 20% down payment. PMI typically ranges from 0.5% to 2.5% of the loan’s value every year; the higher your PMI, the less money you put down.
You usually won’t have to pay mortgage insurance until you’ve paid off your mortgage. Once you achieve 20% equity in the home, you can consider refinancing it. The PMI fee also goes away after your outstanding loan amount reaches 80% of the home’s purchase price.
Even if you can afford to pay a 20% down payment and the required monthly expenses, it is critical to remember to earmark a portion of your income for unexpected expenses. The Federal Housing Administration (FHA) requires a 3.5% percent down payment for FHA loans. Some conventional loans only require a 3% down payment. VA and FHA loans allow some buyers to purchase a home with no money down if the seller covers closing fees.
Lenders will consider all of your financial obligations when determining how much money you can borrow. With this in mind, making large purchases like a new automobile before applying for a home loan isn’t the best idea since the car loan and new payments could jeopardize your debt-to-income ratio and, thus, your ability to qualify for a mortgage.
Keep in mind that all of your monthly expenses, including your mortgage payment, shouldn’t consume more than 40% of your total monthly income.
Real estate is all about location. There’s an endless number of possible price points for homes depending on the area or market in which you’re buying.
In addition, you should also think about the property taxes you’ll have to pay and any extra house insurance (i.e. flood insurance) you’ll need, depending on the state, city, or region in which you’re interested in buying a home.
House prices increase, plateau, and even decline over time depending on factors such as the state and part of the city in which you’re buying. It’s a good idea to research the current real estate market trends to get an idea of how much homes in the area will cost.
Your credit score will have a huge impact on the mortgage interest rate you’ll receive if approved for a loan.
To be able to purchase a $700,000 property with a down payment of $140,000, you’d need to earn $104,450 annually. The estimated monthly mortgage payment for a $700,000 property would be $2,437.
Buying a home at the upper end of your budget might seem alluring, but you should think about houses that fall more in the center of your price range. You’ll have some extra cash on hand to take care of unexpected expenses such as repairs or maintenance.
Also, you may try saving several months’ worth of mortgage payments in advance. You can then transfer the money you saved to a different bank account and access it when needed.