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Real Estate

How much income do you need to buy a house?

comp:0000507a7182:00000018e7:07e5 0 <div class="the-content clearfix"> <p>If you&#8217;re in the market for a new home, chances are you&#8217;ll have to compromise at some point along the way. Maybe you&#8217;ll have to commute a little farther than you&#8217;d like in order to get the best <a href="http://www.zillow.com/local-info/">value</a> for your money. Or perhaps you&#8217;ll forgo a huge backyard to be closer to the city.</p> <p>And when it comes to finances, you might find a disparity between how much house you want and how much house you can purchase given your gross monthly income and other factors.</p> <p><a href="http://www.zillow.com/mortgage-rates/">Home loans</a> are made against your ability to repay. While the <a href="http://www.zillow.com/mortgage-rates/">mortgage</a> loan is secured against the house, it is really made against your income. That&#8217;s what <a href="http://www.zillow.com/directory/mortgage-lenders/">mortgage lenders</a> look for — income to offset liabilities.</p> <p>Simply put, the amount of income you need to purchase a house will vary by your payment comfort level, including any other monthly debt obligations you might have.</p> <h3>Important terms</h3> <p><strong>Mortgage payment:</strong> Principal, interest, property taxes insurance and <a href="http://www.zillow.com/mortgage/help/Private-Mortgage-Insurance.htm">mortgage insurance</a>, if needed</p> <p><strong>Consumer debts:</strong> Minimum payment obligations on things such as auto loans, credit cards, student loans, personal loans and installment loans</p> <p><strong>Other debt obligations: </strong> Alimony and/or child support or any other court-ordered repayment obligations</p> <h3>Running the math</h3> <p>Here&#8217;s a simple formula to calculate the amount of income you&#8217;ll need to purchase a home:</p> <p><strong>Target mortgage payment + consumer debts ÷ .36 = Gross monthly income needed to qualify</strong></p> <p>Most lenders limit your debt-to-income ratio (how much of your monthly income pays debt) to between 36 percent and 45 percent. While the exact ratio varies by lender and loan type, it&#8217;s best to base your calculations on the lower end to ensure that you won&#8217;t overextend yourself financially.</p> <p>So, if your target mortgage payment is $2,000 per month and you have consumer debts of $300 per month, you will need $6,388 gross monthly income to offset your housing expenses and consumer obligations.</p> <h3>Down payment</h3> <p>Your down payment is another important factor in determining how much income you&#8217;ll need to buy a home.</p> <p>Consider the following loan scenario using a purchase price of $300,000 (assuming no other debts) and the current rates on <a href="http://www.zillow.com/mortgage-rates/">Zillow Mortgage Marketplace</a>.</p> <p><strong>Conventional loan</strong></p> <ul> <li>Down payment: 5 percent ($15,000)</li> <li>Interest rate: 3.26 percent</li> <li>Approximate mortgage payment: $1,770</li> <li>Gross monthly income needed: $4,916<em><br /> </em></li> </ul> <p>So at the end of the day how much income you need to purchase a home is predicated on your monthly income, consumer debt obligations and down payment.</p> <h3>Impact of debt</h3> <p>For every dollar of debt, you will need double that in income. So if you have a $300 car payment, you&#8217;ll need at least $600 per month or more in income to offset that debt.</p> <p>Debt erodes income, and less income translates to less purchasing power.</p> <p>So, does buying a home make sense?</p> <p>Yes, so long as the amount you can borrow for your desired purchase price is in sync with your debt obligations and, of course, your down payment.</p> <div><strong>Related:</strong></div> <div> <ul> <li><a href="http://www.zillow.com/blog/2012-10-02/how-your-fico-score-affects-your-ability-to-get-a-mortgage/">How Your FICO Score Affects Your Ability to Get a Mortgage</a></li> <li><a href="http://www.zillow.com/blog/2012-09-25/10-reasons-why-you-cannot-buy-a-house/">10 Reasons Why You Can&#8217;t Buy a House</a></li> <li><a href="http://www.zillow.com/blog/2012-10-03/4-things-to-know-about-mortgage-insurance/">4 Things to Know About Mortgage Insurance</a></li> </ul> <p><em>Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, California. Scott has been seen in Yahoo! Homes, CNN Money, Marketwatch and The Wall Street Journal. Connect with him at <a href="http://www.sonomacountymortgages.com/">Sonoma County Mortgages</a><a href="http://www.sonomacountymortgages.com/">.</a></em></p> <p><em>Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.</em></p> </div> </div>
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