The time is here: you decided you will buy a home. Congratulations!
But soon after you get motivated to do, conscience kicks in and makes you ask yourself: how much income do I need to buy a house?
Well, it will depend first on the location of which this house is located and also on the type of house you want to buy, obviously.
If you don’t know that yet, and that decision is contingent to the available income you have, here are some informational points for you to understand how much income you need to buy a house:
You have two options when buying a home. The easiest one is when you can take the whole amount out of your own pockets at once. All you need to do is find out how much is the asking price of the home you want to buy and see if it won’t hurt your savings. This is not for everybody, of course. Considering that in 2017, the average home price in America was $398,900; you’d have to have a lot of dough to do that without suffering a huge hit on your finances, right?
The second option is the most common: through a mortgage loan in which a lender buys the house at once, and let’s you live in there while you pay monthly until that value meets whatever the value you both set in the bilateral contract of your mortgage. It is here where calculations start to kick in because it’s not so much your decision, but the mortgagee’s. So it’s important to have some of the guidelines behind their calculations to figure out not only how much income you need to buy a house but other aspects as well.
Mortgage companies use ratios to analyze your mortgage payment. The housing payment ratio (or front ratio) used in this calculation is 30%. The housing expense, or front ratio, compares your total mortgage payment to your monthly income. So the total debt expense ratio (or back ratio) is 36%. This total debt expense, or back ratio, compares your total monthly obligations including your total mortgage payment to your monthly income.
Do you know what is a credit score and how does it impact real estate? A solid credit history is of the utmost importance. If yours is weak, lenders might be wary even if your income is solid.
And you can’t forget that once you go the mortgage way, there will be a down payment, so you need to account for 3.5 to 20% of the total value of the home and add to all the calculations done to assert the ideal income to buy the specific house you want.
So, as you can see, there are no systematic formulas to answer the question of how much income one needs to buy a house. Each lender will weigh the several factors differently and propose a different strategy to cover their risk. That’s why it’s important having a real estate agent by your side to advise you of the best safest paths to success in the housing process.