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How Much House Can I Afford?

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By Andrew Rosen via Iris.xyz

My best buddy and his wife came to visit me the other week. You know him as O-man, an old friend I’ve mentioned in past blogs. (O-Man–don’t let me blogging about you go to your head, you hear?)

Anyway, he told me about some exciting stuff going on in his life, namely that they bought their dream house. It’s a super cool house, and I’m really excited for them. The house checked off all the right boxes for them, although it came at a steep price. Apparently, the Washington D.C. real estate market is a bit pricier than the Brandywine Valley. While talking, the topic arose of how much do I “recommend” he can afford for a house. I won’t divulge the dirty details of the O-man, but I will give you a few different ways to approach this topic.

The mortgage broker way.

Probably the worst answer is to look at what a mortgage broker would give you. It’s not that I don’t like mortgage brokers, but their job isn’t to talk you in, or out, of a house. They provide a service of procuring you the best rate they can. (By the way, Diversified, LLC works with some great ones.) If you ask a mortgage broker, they’ll tell you take 45% of your gross income, subtract out any minimum payments for debts, and you’ll have the maximum payments for which you qualify.

For example: let’s say I make $100,000 per year. 45% of that is $45,000/yr. Take out my car payment of $5,000/yr and you are left with $40,000, or a $3,333/mo payment.

I hate this way, as it most likely stretches you very thin.

The multiplication method.

You don’t have to understand the “new math” they are teaching my kids these days to figure out this next method. The multiplication method says take your gross income and multiply it by 2.5.

(Sorry… were you waiting for more?)

That’s it! So, if I make that $100,000 per year, my home should be approximately a $250,000 loan. This assumes I put the traditional 20% down. Oddly enough, I don’t hate this method as much as the mortgage broker way. I wouldn’t write a financial plan based off this method, however. But under normal circumstances, I do think this gives you a general sense of your price range.

Read the full article at Iris.xyz.

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