When you’re thinking about buying a new home, there is a lot to think about. From credit scores to debt-to-income ratios and even the home value-to-income ratio. But what is the home value to income ratio and why should you care about it?
What is the Home Value to Income Ratio
If you are having difficulty deciding the best place to invest in real estate, your decision might come down to a few key numbers. One of those numbers is the home value to income ratio.
A home’s value-to-income ratio shows how much a home is worth relative to how much it costs for someone to live there — or, in other words, what percentage of the homeowner’s income will be needed for mortgage payments and other living expenses.
This ratio can help you in determining if a potential property is affordable for you to buy.
And that’s not all; this number also helps buyers determine their ability to afford homes based on their current financial status versus future projections.
Why Your Home Value to Income Ratio Matters
When you head to the lenders, one of the ratios they will look at to determine whether or not you can afford your new home and whether or not they will lend you the money to buy it is the home value to income ratio.
Typically, lenders feel that a homeowner can afford a home that falls between two and two and a half times their annual income.
For example, if you make $50,000 dollars a year then you should be able to afford a $100,000 to a $150,000 dollar house.
This is just a guideline and there are many other things lenders look at to determine whether or not they will give you a mortgage.
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How Much Home Can You Afford? Mortgage Rule of Thumb
Another way to look at this is your monthly mortgage payment.
You don’t want to spend more than 30 percent of your monthly income on your housing expense.
This will include your mortgage, taxes, and insurance.
If you’re single all of this will fall on your income.
If you have a partner, then both incomes will come into play.
How Does Your Debt-to-Income Ratio Impact Affordability?
Another ratio that you need to take into consideration is your debt-to-income ratio.
This looks at your monthly debt and determines what percentage it is of your income.
For example, if you make $2,500 dollar a month and you pay $1,000 dollars in debt payments each month, your debt-to-income ratio is 40 percent.
($1,000 / $2,500 =.40%)
Banks want to see a number under 28 percent.
What Other Factors Determine if You Can Buy a House?
Other factors that will determine whether or not you can get a mortgage include your credit score, as I mentioned, how much you have for a downpayment, and how long you have been at your current job.
The lender will want to see that you have worked at your current job for at least two years.
They will also want to see how you got your downpayment.
Your annual household income will play a part as well.
Your debt will be an issue as well. So, if you have a lot of credit cards and credit card payments you might want to get them paid off first before you try to get a mortgage.
Ge your monthly payments as low as possible.
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To Sum it All Up:
Your home value to income ratio is important but it is only one part of buying a home. There are many hoops you need to jump through before you will be able to sign on the dotted line and move into your dream home.