When starting a home search one of the first questions I hear is “what price home can I get approved for?” (I know, not great English)
You need enough income to cover the mortgage, property taxes, insurance, HOA fees (if any) plus any other monthly debt payments with at least 55 cents per dollar income left over. It’s what’s called debt-to-income ratio or DTI and while it can sometimes be higher or a bit less, it is about 45% maximum.
For example – A $350,000 price home with 20% down would have an estimated mortgage payment plus monthly “budget” for property taxes and insurance of about $1,900/month*. If car payments and credit card or installment loans equal another $600 then the total monthly amount would be $2,400. For that the minimum income needed would be $5,515 monthly at 45% “DTI”.
Of course the first question to I ask back is what payment amount do YOU feel comfortable with. It’s not unusual that I hear less than what they could get.
That’s fine, in fact a better answer.
Salaried or Self-Employed?
Caution – Lender’s math is complicated when calculating your income. They want to see a two year history of predictable income. That makes sense, right?
So if you are full time, paid a salary and have been doing the same kind of work for 2 years then the current gross income is what is used. If, like a lot of people I see in LA, you are still writing that script and your income fluctuates you will never be able to calculate the income a lender will use.
Self-employed or salary both can work. The second just requires more math and experience – that’s what I do.
Tip – remember about the 2 year income history? If you are thinking of buying a home (or getting a refinance) don’t quit your day job and start writing that script full time yet. You see self-employment income is calculated as a 2 year history of NET income based on last 2 years’ FILED tax returns.
Long time to wait.
What’s Your Number?
I can help you with that so you will know what your “qualifying” income is. I might even be able to help with some script ideas.
*A $280,000 loan with a rate of 4.5% (4.589% APR) is $1418.72/month