How Much House Can You Afford?
How much you can afford is determined by a relatively simple formula. Lenders generally figure that no more than 28 percent of your income should be for the total housing costs. In addition, they require that your total monthly debt be less that 36 percent of your income. (Note: These are general numbers. Other loan programs may allow higher percentages.)
For example, if you make $48,000 a year, divided by 12 months, your monthly income is $4,000. (Remember, that’s $48,000 in gross pay, before federal and state taxes are removed.) Twenty-eight percent of $4,000 is $1,120. That is the most you can make in a monthly mortgage, taxes and insurance payments.
Generally, to quality, the self-employed buyer must have been self-employed in the same line of work for at least 24 months before applying for a loan. Lenders use your net income, the figure at the bottom of schedule C of your federal income tax form, to decide how large a mortgage you can carry. But they don’t look at what you earn now or what you made last year. Rather lenders figure the monthly average of your income over the past 24 months. Also, overtime pay & bonuses sometimes may not be figured into your average income.
Don’t forget that points, closing costs & other out-of-the-pocket expenses probably will come out to about one percent of the mortgage amount.
Source: Putnam County – New York Magazine 2017-2018 issue