How Much of My Monthly Income Should Go Towards Housing?

This is a typical question many homebuyers ask.  How much of my income should be applied to my house payment?  The answer you'll hear from one lender to the next or depending on the loan program can be a wide range. For example, many conservative lenders will say it is between 28% and 36%. While more aggressive lenders may allow up to 50% of your monthly gross income on conforming and non-conforming loans.

Are you budgeting already?

Figuring out how much you can afford for your monthly housing payment shouldn't automatically be determined by an arbitrary percentage. Some people are comfortable paying a certain percentage each month and then there's others who have the means to allocate more money for housing such as half of their income. 

A large majority of conforming mortgages are underwritten by an automated system that uses a maximum back-end DTI percentage of 43 or 45. Other programs like an FHA (Federal Housing Administration) loan are more generous and may offer the borrower a debt-to-income ratio up to 55%.

Important factors that dictate an automated approval are things such as the individual's credit profile, credit score, down payment, liquid assets, and type of loan.  What got one person approved doesn't always mean it will work for another borrower with many of the same data.  Getting advice from an experienced loan officer is a great place to start.

To clarify, the back-end debt to income (DTI) ratio consists of the housing payment and the borrower's other monthly debt obligations.  A front-end DTI is only the housing payment and many lenders use 28-33% but that is not set in stone so it pays to use a company that can shop around for multiple programs to satisfy your financial goals.

Real Examples

Let’s look at two borrowers whose gross monthly income is $8,000.

Borrower A has monthly debt of $1500 and Borrower B has monthly debt of $800.

FHA Mortgages

FHA will permit as much as 55% debt ratio.  Monthly Income * 55% = max housing and debt

If the gross monthly income is $8000 then $8000 * 55% = $4400

Borrower A has monthly debt of $1500.  If max housing and debt is $4400 then the difference may represent the maximum housing payment.  $4400 – $1500 = $2900 housing payment limit.

Borrower B has monthly debt of $800. If maximum housing and debt is $4400 then the difference may represent the maximum housing payment.  $4400 – $800 = $3600 max housing payment.

Conventional Loan

A conventional loan may offer up to a 50% debt-to-income ratio.  Income * 50% = max housing and debt

If the gross monthly income is $8000 then $8000 * 50% = $4000

Borrower A has monthly debt of $1500.  If max housing and debt is $4000 then the difference may represent the maximum housing payment.  $4000 – $1500 = $2500 max housing payment.

Borrower B has monthly debt of $800. If max housing and debt is $3000 then the difference may represent the maximum housing payment.  $4000 – $800 = $3200 max housing payment.

So, you know your maximum allowed payment. What is the maximum sales price?

Once you know your highest payment you're eligible, simply do the math in reverse to determine the maximum loan and sales price.   

While you can try to do this to get an approximation, other critical factors that must be included are the county property taxes, homeowners insurance, and if applicable mortgage insurance, flood insurance and HOA fee.  That's a lot of math to do without the necessary and accurate information.  These variables easily accessible by a licensed mortgage professional.

Home Selling Tips to Net You More Money

You finally decided to sell your home. However, you are undecided to use a licensed realtor or to sell it yourself. You figure you can save a lot of money by selling it yourself. After all, your home is located in Orange County, California a high demand area.  All you feel is needed is to just get it in front of 1000s of real estate agents. Real estate agents are overpaid and don’t know more than you do.

Tip #1
Hire a Local Real Estate Agent

This kind of thought process is what creates a lot of mistakes, cancelled escrows, and potential lawsuits by you or the home buyer. I could go into the many ways this could happen during the signed contract phase or even prior to contract but that is for another day.

Quick Facts:
Statistics show that selling your home with the assistance of a professional real estate agent will reward the seller handsomely with a higher profit than if they tried to sell it on their own.. Moreover, the difference is enough to pay the commission to the listing agent along adding “more money” in your pocket.

88% of buyers purchased their home through a real estate agent or broker which is from 69% in 2001.

Data shows that approximately 90% of FSBO’s end up listing their home with a Realtor (yes, 90%).

So, use a local real estate agent.

 

Tip #2
Get Your Home Inspected

Prior to listing your home for sale and to avoid the buyer renegotiating during the contract phase, have it inspected by a well-known Orange County home inspection company. You don’t want the buyer asking for a price reduction to fix something.

Did you know that buyers tend to ask for an excessive amount on something that may cost $250 to repair yet they want a $1,000 price reduction? If it costs $500 to repair, they want a $2,000 - $3,000 price reduction.

If they want it repaired during the contract, you are usually paying a hefty premium for a quick turnaround than if you had it inspected 2-3 months prior to listing, you can conveniently shop around.

In some instances, the repair can be a deal killer.  So, if you want a better return on investment (ROI), have your home pre-inspected before listing it for sale.

Loan Limits Increased for Borrowers in Orange County

The government service enterprises, Fannie Mae, and Freddie Mac are raising loan limits on January 1, 2018 in 98% of counties nationwide because of the rapid growth in housing prices.

In high-cost areas of California typically near the coast, the county loan limits can be as much as $679,650, up from $636,150.

What this means for home buyers?

The higher 2018 loan limits may allow low- and moderate-income home buyers a bigger selection of homes to choose from when shopping for a home.

For the market areas, we are specifically serving borrowers in, here are your new one-unit confirming loan limits for 2018:

Greater Los Angeles

    Los Angeles County: $679,650

    Orange County:  $679,750

    Riverside County: $453,100

    San Bernardino County: $453,100

    Ventura County: $672,250

    Santa Barbara County: $625,500 

    San Diego County:  $649,750  

Among the benefits these new limits are significant is that it place some borrowers into a conforming loan versus a jumbo loan which means they may be able to come in with the 3% minimum on a home purchase up to $467,000.

Due to the L.A. and Orange County conforming limit increases, homebuyers can put down 5-percent and avoid the need for jumbo financing. Their maximum purchase could go up to $700,000 or $704,000 using an FHA loan that requires a 3-percent down payment. In San Diego, it enables home buyers to purchase a home up to $673,300.