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I heard a good rule of thumb is to do a mortgage no more than 2 or 2.5 your annual salary. Similarly at least for some banks I’ve heard they won’t even let you borrow more than 4.5 times your salary.
My question is this just refers to the mortgage and not the overall price of the house right?
These are just hypothetical numbers used for the sake of clarity:
Say a house cost $500K. You make $100K a year and also can put down $100K as a down payment. Since the house is $500K you would not be able to borrow that much from most banks without the down payment since it is 5 times your salary. However with $100K down you are borrowing “just” $400K. So hypothetical banks would allow you to do it since it is just 4 times your salary.
Or for a less risky venture it could be like this.
A house cost $350K. You make $100K a year and also put $100K as a down payment. The loan amount would then be $250K so you’d be doing 2.5 times your annual salary. Right at the limit of what I’ve seen suggested as a good rule of thumb for the most you should borrow.
I have only seen that kind of calculation on this website.
The posted guidelines for most loan types reference 31/43 but you can be approved much higher.
31/43 refers to the debt ratio. The first number is the Housing ratio: the total house payment, including taxes, insurance and Mortgage Insurance, is preferred to be 31% or less than the monthly salary. However you can go as high as 49.99%, depending on other factors such as credit score.
The second number refers to the total debt ratio: the house payment plus all credit report debts (monthly payments) is preferred to be 43% of the monthly salary. But again, this can be up to 55% for FHA, and technically VA does not have a debt ratio or credit score guideline, but lenders impose them, so that 55% tends to be the ceiling.
I heard a good rule of thumb is to do a mortgage no more than 2 or 2.5 your annual salary. Similarly at least for some banks I’ve heard they won’t even let you borrow more than 4.5 times your salary.
My question is this just refers to the mortgage and not the overall price of the house right?
These are just hypothetical numbers used for the sake of clarity:
Say a house cost $500K. You make $100K a year and also can put down $100K as a down payment. Since the house is $500K you would not be able to borrow that much from most banks without the down payment since it is 5 times your salary. However with $100K down you are borrowing “just” $400K. So hypothetical banks would allow you to do it since it is just 4 times your salary.
Or for a less risky venture it could be like this.
A house cost $350K. You make $100K a year and also put $100K as a down payment. The loan amount would then be $250K so you’d be doing 2.5 times your annual salary. Right at the limit of what I’ve seen suggested as a good rule of thumb for the most you should borrow.
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