How Much House Can You Actually Afford | House Affordability

Ah, riddle me this, Mortgage Patriot Nation — how much home can you afford? Simple question: how much home can you afford today, in the year 2024? Because everything's changed, right? Rates have gone up, property taxes have gone up, insurance rates have gone up — everything's gone up. So how much can you afford today? We're going to break it all down today with simple formulas. I'm going to show you exactly what lenders use all across the country. They are bound by federal guidelines from Fannie Mae and Freddie Mac. I'll show you what those calculations are. I'll show you the other factors that go into that computation. By the end of this video, you're going to know exactly how much you can afford in a home. So let's kick off this rodeo right now. Hi folks, I am the Mortgage Patriot, Kevin Fagan, nestled in the Hill Country above San Antonio, Texas, serving proud Texans and all you great folks all around the country. So before I get into the content, if you would hit the Like and Subscribe below, that helps me and of course brings to you through the YouTube algorithms my library of videos that are very helpful for you. And speaking of that, I want to reference a great companion video with this: it's 2024 The Best First-Time Home Buyer and Down Payment Assistance Programs Now. So check out that video after this one. It's going to give you a screenshot of a scan. If you scan that little code there, it's going to direct you to a possible grant that's based solely on where you live. So make sure you hit that, because that could make you $6,000 in grant money right away. You'll have that in your back pocket as you go shopping for a brand new home, which of course helps with closing costs and anything else. So let's get into that content regarding this subject matter of how much can you afford today. Right now, to understand how much home you can afford today, we need to look at all the factors that are involved. And there's plenty of them, but let's start at the top and I'll go through each one just quickly, but then I'll get into the more detailed with the numbers. How much can you afford today is a factor of your credit scores right now, how much down payment you're going to apply to the purchase price, and how much income you have on a monthly basis, what the property taxes are for your area, how much the property insurance will be on that home in that area, and then lastly what are the HOA or Home Association or condo fees — what are those monthly dues of any association that's tied to that property or that community. So let's look at all those very quickly and then we'll get into some numbers. Credit scores of course play big into how much house can you afford. Why? Because if you have a higher credit score, then you have a lower rate. And if you have a lower rate, then you have a lower payment, which of course helps you with your affordability. So there are minimum threshold credit scores for each type of loan that you would be getting. So whether it's an FHA, your minimum credit score required is a 580. You're going to want to get better than that, but theoretically we can get something done at a 580 or better. Conventional, the minimum threshold is 620 or better. On a VA loan, it's going to be 600 or better. And finally USDA, it's usually 600, might be 620, they might have changed that recently. Either way, improving credit scores is pretty easy. So here's a video right here that I did also you might want to reference: How to Move Your Scores Very Quickly Over a One Month Period. And I can help you show how to do that. There's some tricks in there. So watch that video, and moving your scores is just a matter of time and action steps. In other words, it might take two or three months, it might take two or three action steps, but I can help you move your scores. So just know that. So as I mentioned, the second factor of how much home you can afford is how much you put down relative to the sales price. For example, if you're buying a $300,000 house and you put down 20%, then your loan amount is going to be much smaller than if you put down 5%. So that's going to make your affordability better because your monthly mortgage payment will be lower because you're borrowing less. Also the lender is going to give you better pricing. Why would that be? Because they're more comfortable with you putting down 20%. You've got far more skin in the game, and so they just offer a more competitive rate. So the smaller your down payment is, the less off you are for getting the best rate. But having said that, here are the thresholds for down payments. So for an FHA loan, you're allowed to put down as little as three and a half percent. For a conventional loan, you can go down to 5%. Now in some cases, you can even go down to 3% if you make less than 80% of the area median income. On a USDA loan, that is a zero down loan. So why would everybody use it? Well, it's got some restrictions to it. You can ask me about those, but they're mainly for rural properties outside of city limits. Lastly, the VA loan of course is 0% down as well, but you need to be a veteran. And if you're a veteran, great — take advantage of the VA program. So let's put the puzzle pieces together now and let's find out exactly how much you can afford. And the answer to that is we take your annual income. It could be the household — it could be you and your spouse, could be just yourself, could be just your spouse, could be whoever's combined incomes with you in a household. Let's say for example that that amount is $84,000 a year. Now we want to get to a monthly figure. We divide $84,000 by 12. $84,000 divided by 12 is $7,000. So that's your monthly income for your household. Now how much housing payment can you afford? The answer on an FHA loan and a conventional loan is 38% of that. In other words, the FHA guidelines and conventional guidelines say you can have up to 38% of your income, of your monthly income, expressed in a housing expense. So 38% of $7,000 is $2,660. So $2,660 is the maximum that an FHA or conventional loan will say that you can go up to, and we will still grant you — you are still approved from an income standpoint for the purchase of a home. And there are five factors that go into that payment. So you have to have all these five factors inside of that $2,660. And those are your principal and interest, your property taxes, your property insurance, your HOA dues or community dues, and lastly your private mortgage insurance or your MIP, your mortgage insurance premium. We call that the front-end ratio or the housing ratio. All five of those factors have to fit inside that 38% of your monthly income. There's one other ratio that the underwriters will look at very closely, and that's the back-end ratio. What is the back-end ratio? Well, that's everything but the front-end ratio. So in other words, aside from your housing expenses, it's things like all your revolving cards or any other credit you might have that's revolving, all your installment loans which could be car loans, student loans, and any other miscellaneous debt that shows up on your credit report. That's all back-end ratio. And so if you stack your front-end ratio with your back-end ratio, that entire amount cannot exceed — in the case of an FHA loan for example — about 54%. You can go slightly higher than that, but we got to keep it under that else it's going to be very hard to get approved. So let's go back to our $7,000 per month example, and you can do your own example with your own income. But we're going to take $7,000 and we're going to take 54% of that to get a total debt ratio that comes out to $3,780. If we knew that our front-end ratio expressed in dollars was $2,660, we still have room to go up to $3,780. That's the ability to have more debt of about $1,120. In other words, you could have car payments, revolving cards, and so forth, student loans, that could be up to about $1,120 and still not exceed your total debt, and you'd still be able to get approved in the case of an FHA loan. And in the case of a conventional loan, that back-end ratio gets squeezed a little bit. Your total ratio gets squeezed — it can only be up to 49.99%, just below 50% total on a conventional loan. Okay, let's break down that front-end ratio a little more in detail so I can show you how this actually all fits together. And remember, we said we're basing all this on a $7,000 household income. If you called me up and we talked and you said, "Hey, my household makes about $84,000 a year, how much house can I afford?" I'd multiply that by 38%, we got the $2,660 for a front-end ratio for either an FHA loan or a conventional loan. Now we're going to break down that $2,660 and what all those components are. And if you are looking at this mortgage calculator, you'll see that the biggest component at the bottom of the screen here is $1,875. That is the principal and interest based on a $300,000 property with a 3.5% down FHA loan at 6.74%. Those factors come out to exactly $1,875.77 as principal and interest. But that's not the whole story. Like we said, there's five components. That's the first component, it's the biggest one. The second one is property taxes. Everybody's property taxes is going to be different. How do you find out what your property taxes are? Well, in the state of Texas, I usually ballpark as an estimate 1.85% of whatever that purchase price is. If you're in California, it's going to be less than that, believe it or not — their taxes come in about 1.3 to 1.5% of the purchase price. Arizona even less, maybe 1.1 to 1.2%. Florida is pretty low, 1.1 to 1.2%. But in your Northeast sectors, of course it's higher, over 2%. The best thing to do is go to your County Appraisal District and find out what those factors are for your county or your area, or you can just look at properties that you like and see what their actual tax amount is. And I can help you work with that. In this case, we've got a factor of 1.85% of property taxes based on a $300,000 property. So what's the monthly taxes? It's going to be $462.50. That's an estimate, but that's going to be close. Third number is your homeowner's insurance. Again, that's going to vary all across the country. Coastline homes are going to have a higher insurance factor to them because of the potential for adverse weather. In Texas, you're probably looking at about .65 to .75 cents per $100 of coverage. I estimated $160 for insurance for this property per month. And lastly, you have the PMI, which is a mortgage insurance. What is that? That's FHA saying, "Hey, we're giving you a 96.5% loan. You're only putting down three and a half percent. We're a little scared that you could back out and you don't have much skin in the game, so you have to be insured and you have to pay for that insurance." In the case of FHA, it costs 0.55 of 1% of the loan amount. That comes out in this example to $132.60. And lastly, we added $30 as an HOA example. So all five of those numbers go into your front-end ratio. And what is that final number? It's $2,669. That's an estimate. But lo and behold, what does that match up with? Your $7,000 a month figure multiplied by 38 gets you to $2,660. That's what this payment is. So in other words, if you came to me and you said you make $84,000, how much house can I buy today given today's rates and given all these other factors, I would say you're maxing out at a $300,000 property. Again, you can do this yourself, right? But call me for more expert help. But just to get a ballpark figure for yourself, just jot down what you make for the year, your household annual income. Divide that by 12 to get a monthly figure. Multiply that by 38% to get the front-end ratio for an FHA or a conventional loan. Then multiply that same monthly figure by 0.54 to get the back-end ratio so you can see how much debt you can have in addition to your housing expenses. So that'll give you a ballpark to start off, and that'll kind of tell you how much house you can afford — at least a payment. Then talk with me. I'll find out what your property taxes are for your area. I can kind of estimate what your insurance would be. And I'll tell you what your mortgage insurance factor will be on an FHA or a conventional loan. But we'll figure it out all together. Call me at 210-317-6514. I'm Kevin Fagan, the Mortgage Patriot, on your side. Let's make it a great one. END OF TRANSCRIPT