Mortgage can only cost 3x your yearly income, max?

HenryH · Aug 10, 2007

I'm in college and have just recently started to look into mortgages. Most articles/calculators I come across state that a house can cost no more than three times your yearly income.

So if I'm earning $150,000/yr., that means I can afford a $450,000 house. Paid over 30 years and at 7% interest, that's a mortgage payment of approximately $3,000/month.

However, what if, earning $150,000/yr., I was willing and capable of paying a greater monthly mortgage payment? Say, for a home that costs $750,000? At the same interest rate (7%) and spread over the same length of time (30 yrs.), a home of that price would break down to roughly $5,000 month.

With a hypothetical income of $150,000/yr. -- $12,500/month -- I would be left with $7,500 after paying the $5,000 mortgage bill. As long as I'm not juggling exorbitant debts (sports cars, etc.), $7,500/month is plenty to live off of (of course, I realize tax would subtract some of this).

However, judging from what I've read recently, a bank would refuse to loan me the mortgage for a $750,000 home simply because $150,000 x 3 is only $450,000.

Is this correct? Would a bank decline the loan since my income doesn't fit into the "equation," even though I would be more than capable of making the monthly payments of $5,000?

stbxTechie · Aug 10, 2007

HenryH said:
Most articles/calculators I come across state that a house can cost no more than three times your yearly income.

That's traditional, yeah. It was also pretty much dead during the recent real-estate boom; it's anyone's guess with the current fallout from the subprime market whether it will be back.

More recently, the estimate has been "your monthly mortgage payment should be no more than 1/3 of your gross monthly income," and a lot of banks have been willing to exceed that.

However, what if, earning $150,000/yr., I was willing and capable of paying a greater monthly mortgage payment? Say, for a home that costs $750,000? At the same interest rate (7%) and spread over the same length of time (30 yrs.), a home of that price would break down to roughly $5,000 month.

That would probably be excessive under general guidelines; your largest payment would be $4,166. That said, they might well approve it anyway, or would have until the last month or so.

With a hypothetical income of $150,000/yr. -- $12,500/month -- I would be left with $7,500 after paying the $5,000 mortgage bill. As long as I'm not juggling exorbitant debts (sports cars, etc.), $7,500/month is plenty to live off of (of course, I realize tax would subtract some of this).

At that level of income, if you were single in many higher-tax states states, the taxes might be as high as about $4000 a month. Also remember that you've probably got student loans.

However, judging from what I've read recently, a bank would refuse to loan me the mortgage for a $750,000 home simply because $150,000 x 3 is only $450,000.

Is this correct? Would a bank decline the loan since my income doesn't fit into the "equation," even though I would be more than capable of making the monthly payments of $5,000?

What impact the present changes in the mortgage market will have are anyone's guess, but in general over the past couple of years, they've been willing to write anyone a mortgage for practically any amount they might conceivably be able to afford.

Bear in mind though that you also need a down payment to get good mortgage terms; zero down will get you a higher rate and a requirement for PMI, or something like an 80/20 pair of loans (with a higher rate on the 20% second mortgage.)

mshheaddoc · Aug 10, 2007

Many houses are not fully leveraged if you're buying a $400,000 house as the above poster stated. 3x is a good rule of thumb but usually your income ratios will be the more telling part of your application of how much you can afford. If you have alot of other debts (cars, boats, student loans, etc) this will affect how much home you can get. The good thing is though, sometimes if you maintain a relationship with a local bank they are willing to help you out with being more lienent. Also, remember there are also first mortgages then home equity loans which I've seen people use to purchase homes.

Creative financing IS out there though ... 😉

Sidenote, remember you have to qualify with taxes and insurance, if your house is costing that much, you're going to have a couple thousand dollars in taxes to tack on as well ...

HenryH · Aug 11, 2007

Thanks for you guys' replies.

stbxTechie -- What are some of those "high-tax" states?

...so I can know to stay the hell out of them! Right now, I live in Georgia, and would prefer to stay in the southeastern USA; do you know if states in this region are typically high-tax? (I still live with my parents)

For both of you guys: what would be an estimated minimum income to afford a house that costs, say, $950,000?

For the record, houses are fairly expensive where I live; a house that costs $500,000 in a suburb outside of San Antonio, Texas, would cost closer to $800,000 or more here.

Sol Rosenberg · Aug 11, 2007

Rules of thumb are bad. The underwriting guidelines that most lenders use is a 50% debt (including your mortgage payment, property taxes, homeowners insurance, as well as all of your other debts) to income ratio. It's not how much of a house you buy, but how much you borrow and at what interest rate (which determines your monthly mortgage payment.) This 50% is not a rule of thumb, it's what most lenders use to approve a loan (assuming at least 5% down payment and excellent (700+?) credit.)

You can take your income (or expected income) and assume some interest rate and other debt, and back-calculate the maximum house payment that you can afford, and therefore, the maximum house price that you can afford.

A table that lists tax burdens by state can be found here:

http://retirementliving.com/RLtaxburdens.html

As a general rule, Northeast and West Coast states have the highest tax burdens, and Southern/Midwest states have lower burdens, but there are exceptions. Unfortunately, there is no general trend for states in the Southeast. While quite a few of the states in the Southeast have quite a low tax burden, there are some obvious outliers (Arkansas, Louisiana, North Carolina -- that's all I saw from a quick scan.) Again, rules of thumb are bad.

stbxTechie · Aug 11, 2007

HenryH said:
Thanks for you guys' replies.

stbxTechie -- What are some of those "high-tax" states?

...so I can know to stay the hell out of them! Right now, I live in Georgia, and would prefer to stay in the southeastern USA; do you know if states in this region are typically high-tax? (I still live with my parents)

California's one of them; state income tax out here gets up to 9.3% pretty quickly on most middle/upper-middle class incomes (and then goes up another percent when you're over a million in annual income) - a single physician making $150,000 is going to pay the full 9.3% on something like 2/3 of their income.

On the plus side, we have merely middling property tax rates, and with prop. 13, long-term residents who don't move end up paying relatively quite low property taxes.

I haven't paid taxes on any kind of adult income in any other states; Mass has a bad reputation for them, but googling shows they're a flat 5.3% or only a little more than half of what we pay in California.

Mortgage can only cost 3x your yearly income, max?

HenryH

AA-S

stbxTechie

Very new at this!

mshheaddoc

Howdy

HenryH

AA-S

Sol Rosenberg

Long Live the New Flesh!

stbxTechie

Very new at this!

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