What is most accurate income to mortgage calculation?

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Joe Nathan
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What is most accurate income to mortgage calculation?

Post by Joe Nathan » Sun Jun 16, 2019 8:53 am

Scenario for numbers sake:
Lets say you were going to buy a 600k house and annual income is 450k. If you bought a house say 5 years ago and currently have 150K in equity mainly due to a good real estate market, how would this apply going forward? Would you consider this a house mortgage of 1x annual income with that equity to roll over, or is it still 1.33x annual income? I guess I am just wondering if the calculation changes vs the person who has rented for the last 5 years and had to save 150k the hard way in strait up cash?

runner3081
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Re: What is most accurate income to mortgage calculation?

Post by runner3081 » Sun Jun 16, 2019 9:16 am

Maybe I a missing something, but you are over complicating this.

You asked about income to mortgage.

You should only be looking at your income to the mortgage - not value/cost of the house (or equity in a previous house).

If you put 150k down on the house with a 450k mortgage and a 450k salary - it is 1:1.

chevca
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Re: What is most accurate income to mortgage calculation?

Post by chevca » Sun Jun 16, 2019 9:20 am

What runner said.

And, it doesn't matter if the person owned or rented prior. If they have a $450k income and take out a $450k motgage, they're in exactly the same spot. Doesn't matter where the down payment came from.

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Joe Nathan
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Re: What is most accurate income to mortgage calculation?

Post by Joe Nathan » Sun Jun 16, 2019 9:27 am

Yeah, maybe wasnt the best way to ask. So when you consider say 1x income, its strictly based on the money mortgaged and not the purchase price? I guess it's still money being spent whether its mortgaged or out of your bank account. So for being financially responsible, the purchase price isnt being considered soley what you need to mortgage?

chevca
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Re: What is most accurate income to mortgage calculation?

Post by chevca » Sun Jun 16, 2019 9:35 am

Correct. If one is just figuring income to mortgage amount, the purchase price can be left out. Folks get money for a down payment all sorts of ways.

Small Savanna
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Re: What is most accurate income to mortgage calculation?

Post by Small Savanna » Sun Jun 16, 2019 9:36 am

Not exactly the question you asked, but what is really relevant in looking at a home purchase is whether you can afford the monthly payment. For that calculation, the price of the home isn't important, it's the amount you borrow. Lendors will use use rules of thumb, for example your payment should be no more than 28% of your income. You can also compare the payment to what you're paying for housing now, and decide if you're comfortable with the number. Even if the lender thinks it's OK, it may be more than you want to spend each month.

runner540
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Re: What is most accurate income to mortgage calculation?

Post by runner540 » Sun Jun 16, 2019 9:54 am

Joe Nathan wrote:
Sun Jun 16, 2019 9:27 am
Yeah, maybe wasnt the best way to ask. So when you consider say 1x income, its strictly based on the money mortgaged and not the purchase price? I guess it's still money being spent whether its mortgaged or out of your bank account. So for being financially responsible, the purchase price isnt being considered soley what you need to mortgage?
Are you looking for permission? What you describe should be affordable under almost any scenario. BUT everyone really needs to run their own numbers with the maintenance, property taxes and insurance on that particular house. In Texas, a $600k house could have property taxes of $15-20k. In other places, it might be $5k.

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Joe Nathan
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Re: What is most accurate income to mortgage calculation?

Post by Joe Nathan » Sun Jun 16, 2019 10:00 am

No like I said just wasnt sure how a down payment and purchase price played into figuring a ratio.

runner540
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Re: What is most accurate income to mortgage calculation?

Post by runner540 » Sun Jun 16, 2019 10:03 am

Joe Nathan wrote:
Sun Jun 16, 2019 10:00 am
No like I said just wasnt sure how a down payment and purchase price played into figuring a ratio.
Ok...but what does the ratio do for you?

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Joe Nathan
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Re: What is most accurate income to mortgage calculation?

Post by Joe Nathan » Sun Jun 16, 2019 10:07 am

Like I said those were hypothetical numbers, we are changing housing situations and just trying to determine what our budget should be and how that falls based on trying to stay around 1x...ish.

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Joe Nathan
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Re: What is most accurate income to mortgage calculation?

Post by Joe Nathan » Sun Jun 16, 2019 10:08 am

And wasnt sure if purchase price or mortgage was the primary figure used and how the down payment figures into it all.

chevca
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Re: What is most accurate income to mortgage calculation?

Post by chevca » Sun Jun 16, 2019 10:24 am

Joe Nathan wrote:
Sun Jun 16, 2019 10:07 am
Like I said those were hypothetical numbers, we are changing housing situations and just trying to determine what our budget should be and how that falls based on trying to stay around 1x...ish.
If you stick around 1x... ish for your income to mortgage ratio, there's really no figuring to be done. That's plenty affordable and responsible in almost any situation.

Yes, the purchase price, down payment amount, taxes, insurance, mortgage amount, income, and whatever else do factor into affordability. But, if one just wants to compare a mortgage amount to annual income, those are the only two numbers that matter for that part.

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snackdog
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Re: What is most accurate income to mortgage calculation?

Post by snackdog » Sun Jun 16, 2019 12:50 pm

The rule of thumb assumes around 5-20% down. You may be able to afford a $450K mortgage on a $10 million home ($2100/mo) but that doesn't mean you could afford the taxes and insurance (>$20,000/month around here).

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ruralavalon
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Re: What is most accurate income to mortgage calculation?

Post by ruralavalon » Sun Jun 16, 2019 1:09 pm

Joe Nathan wrote:
Sun Jun 16, 2019 8:53 am
Scenario for numbers sake:
Lets say you were going to buy a 600k house and annual income is 450k. If you bought a house say 5 years ago and currently have 150K in equity mainly due to a good real estate market, how would this apply going forward? Would you consider this a house mortgage of 1x annual income with that equity to roll over, or is it still 1.33x annual income? I guess I am just wondering if the calculation changes vs the person who has rented for the last 5 years and had to save 150k the hard way in strait up cash?
Joe Nathan wrote:
Sun Jun 16, 2019 9:27 am
Yeah, maybe wasnt the best way to ask. So when you consider say 1x income, its strictly based on the money mortgaged and not the purchase price? I guess it's still money being spent whether its mortgaged or out of your bank account. So for being financially responsible, the purchase price isnt being considered soley what you need to mortgage?
Joe Nathan wrote:
Sun Jun 16, 2019 10:00 am
No like I said just wasnt sure how a down payment and purchase price played into figuring a ratio.
Joe Nathan wrote:
Sun Jun 16, 2019 10:08 am
And wasnt sure if purchase price or mortgage was the primary figure used and how the down payment figures into it all.
The ratio of total mortgage payment (principal + interest + taxes + insurance) to income is a number to consider when purchasing a home. It is a measure lenders use (and you can use) to see if you can afford the new home purchase. That is known add the front-end ratio, and lenders often want to see it under 28%.

The original purchase price or current value of your old house does not enter into the picture at all and does not affect the calculation.

"The back-end ratio includes all of your debts, and as a general rule of thumb it should be 36% or less. Some lenders will go higher: For example, Fannie Mae's lending standards permit back-end ratios as high as 45% with adequate credit and reserves." Motley Fool, "How to Calculate Your Mortgage Payment".

"However, just because you can get approved for a mortgage doesn't mean you can actually afford it. There are several factors that go into home affordability -- for instance, if you're paying college tuition for your child, then your budget might be a little too strapped to take on the maximum allowable mortgage payment. So it's important to make sure your new mortgage payment fits into your own budget before signing the contract."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

mervinj7
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Re: What is most accurate income to mortgage calculation?

Post by mervinj7 » Mon Jun 17, 2019 12:30 pm

Joe Nathan wrote:
Sun Jun 16, 2019 10:00 am
No like I said just wasnt sure how a down payment and purchase price played into figuring a ratio.
The purchase price does effect expenses like property taxes and home owner's insurance, so it can't be entirely ignored.
As far as the ratio is concerned, the most common one used is PITI/(Gross Income) and Debt-to-Income.

Let's do a real-world example of a couple making $300k/year purchasing a $1 million property in CA.

1. Gross Monthly Income: $300k/12 = $25k
2. Mortgage: $1M-$200k = $800k. Mortgage Payment @3.75% APR = $3705/month
3. Property Tax: $1M * 1.26% = $12.6k/year,. $1050/month
4. Home Insurance: $3k/year. $250/month
5. PITI: ($3.7k+$1k+$250)= $5k / month
6. Front-End Ratio (House Expenses to Income): $5k/$25k = 20%

Now, let's assume that they financed two cars at $500/month but otherwise have no other debt.
7. Back-End Ratio (All Monthly Debt to Income): $6k/$25k = 24%

Not withstanding other factors (e.g. bad credit score, no reserves), almost any bank would approve the above loan based on the two DTI ratios calculated.

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