Spending 40% of your total income on your mortgage is probably too much — most mortgage lenders will either not approve your application or charge you a very high interest rate.
Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
"With a general budget, you want to have 50% of your income going toward utilities, mortgage and other essentials," says Reyes. Keeping your mortgage payment under 30% of your income ensures you have plenty of room for the rest of your needs.
If you're an aspiring homeowner, you may be asking yourself, “How much house can I afford a with $70K salary?” If you make $70K a year, you can likely afford a home between $290,000 and $360,000*. That's a monthly house payment between $2,000 and $2,500 a month, depending on your personal finances.
That monthly payment comes to $36,000 annually. Applying the 28/36 rule, which states that you shouldn't spend more than around a third of your income on housing, multiply $36,000 by three and you get $108,000. So to afford a $500K house you'd have to make at least $108,000 per year.
You'll likely need an annual salary of at least $250,000 to finance a $1 million dollar home with a 30-year mortgage, assuming a 20% down payment and low escrow costs. The income required to purchase a million-dollar home varies based on your location, loan amount, mortgage rate and other affordability considerations.
"House poor" is a term used to describe a person who spends a large proportion of their total income on homeownership, including mortgage payments, property taxes, maintenance, and utilities.
If you make $3,000 a month ($36,000 a year), your DTI with an FHA loan should be no more than $1,290 ($3,000 x 0.43) — which means you can afford a house with a monthly payment that is no more than $900 ($3,000 x 0.31). FHA loans typically allow for a lower down payment and credit score if certain requirements are met.
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
The Rule of 28 – Your monthly mortgage payment should not exceed 28% of your gross monthly income. This is often considered the “Golden Rule,” and many lenders abide by it.
Capacity, Credit, and Collateral
The three C's of underwriting play an essential role in the underwriting process. Regarding Capacity, your debt-to-income ratio is the most important component. Ideally, you would like your DTI ratio to be at or below 40%. There are home loan programs that allow up to a 50% DTI ratio.
The TRID rule provides that the borrower can waive the seven-business-day waiting period after receiving the LE and the three-day waiting period after receiving the CD if the borrower has a “bona fide personal financial emergency,” which requires closing the transaction before the end of these waiting periods.
The Bottom Line. On a $70,000 salary using a 50% DTI, you could potentially afford a house worth between $200,000 to $250,000, depending on your specific financial situation.
The 35/45 rule
With the 35/45 model, your total monthly debt, including your mortgage payment, shouldn't exceed 35% of your pre-tax income or 45% of your after-tax income. To estimate your affordable range, multiply your gross income before taxes by 0.35 and your net income after taxes by 0.45.
This can be a great option for those who are struggling to save up for a larger deposit, especially with the current high property prices. However, it's important to keep in mind that even with a 90% LTV mortgage, a 10% deposit can still be a significant amount of money.
The Importance of Interest Rates
When rates are low, you can afford more home. When rates climb, not so much. For example, with a 4% mortgage interest rate, your $2,000 payment could get you a home loan for around $335,000. But if that rate jumps to 6%, the same payment might only stretch to about $270,000.
To afford an $800,000 house, you typically need an annual income between $200,000 to $260,000, depending on your financial situation, down payment, credit score, and current market conditions. However, this is a general range, and your specific circumstances will determine the exact income required.
$1,400 per month qualifies to borrow a loan amount of $204,913; add your $20,000 down payment to this, and you can purchase a home of $224,913. Of course, you'll still need cash for reserves and to cover the loan's closing costs.
Based on that figure, an annual income of $500,000 or more would make you rich. The Economic Policy Institute uses a different baseline to determine who constitutes the top 1% and the top 5%. For 2021, you're in the top 1% if you earn $819,324 or more each year. The top 5% of income earners make $335,891 per year.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
If you make $70,000 a year, your hourly salary would be $33.65.
On a salary of $36,000 per year, you can afford a house priced around $100,000-$110,000 with a monthly payment of just over $1,000. This assumes you have no other debts you're paying off, but also that you haven't been able to save much for a down payment.