Learn how to calculate how much home you might qualify for.
If you’re not ready to speak with a real estate broker or lender and are curious about how much home you might be able to be approved for, here’s a quick and dirty way to find out. Before we dive in, I’d like to preface this with the fact that this is a very rough estimate. Think of it as a “fun” activity if you’re just super curious but not serious about buying a home. Let’s get into it.
Step 1:
Calculate your gross monthly income.
Your gross monthly income is the total amount of money you earn each month before any taxes or deductions are taken out. Here's how you can calculate it:
Salary/Wages: If you are a salaried employee, divide your annual salary by 12.
Example: If your annual salary is $60,000, your gross monthly income is $60,000 / 12 = $5,000.
Hourly Wages: Multiply your hourly wage by the number of hours you work per week, then multiply by 52 (weeks in a year), and finally divide by 12.
Example: If you earn $20 per hour and work 40 hours a week, your gross monthly income is ($20 x 40 x 52) / 12 = $3,467.
Step 2:
Multiply your gross monthly income by 45%.
Lenders typically use the 45% debt-to-income (DTI) ratio to determine the maximum amount of your gross monthly income that can be used for debt payments, including your mortgage. This ratio helps lenders assess your ability to manage monthly payments and repay the loan. A DTI ratio of 45% means that no more than 45% of your gross monthly income should go towards all your debt obligations, including the new mortgage, to ensure you can comfortably afford your home without being overextended financially.
Step 3:
Subtract your total monthly liabilities from gross monthly income.
Monthly liabilities are any recurring monthly debts you have. These can include:
Car Loans or Leases
Student Loans
Credit Card Payments
Personal Loans
Child Support/Alimony
To find your net monthly income available for a mortgage, subtract these monthly liabilities from your gross monthly income. Here's the process:
Calculate Gross Monthly Income: As explained above.
Sum Monthly Liabilities: Add up all your monthly debt payments.
Example: If you have $500 in car payments, $200 in student loans, and $100 in credit card payments, your total monthly liabilities are $800.
Subtract Liabilities from Gross Income:
Example: If your gross monthly income is $5,000 and your total monthly liabilities are $800, your net monthly income available for a mortgage is $5,000 - $800 = $4,200.
Step 4:
Use an online mortgage calculator.
When using an online mortgage calculator, adjust the purchase price, down payment, and other metrics until you reach a maximum monthly payment that matches the value you calculated in step 3. This will provide you with a rough estimate of the maximum home price you might be qualified for.
Keep in mind that this is a very rough estimate and should not be used by serious buyers. If you are serious about buying a home, you should speak with a qualified mortgage professional for a more accurate assessment based on your personal finances and goals.
Hope this helped! Message me for any questions!
✌️ & 🖤,
James Paul Valerio
(323) 420-4669
Get your FREE Ultimate Buyer’s Guide
✨The Ultimate Home Buyer's Guide✨ is a FREE comprehensive blueprint that is meant to simplify the home buying process.
Your real estate experience matters.
Buying or selling a home (especially for the first time) can be nerve-racking. To alleviate teh anxiety, we emphasize educating our clients so they understand what to expect during their real estate journey. If you would like to chat about buying or selling a home, schedule your FREE consultation today by clicking the link below!
James Paul Valerio
Broker & Owner of The Valerio Group, Inc.
DRE #02001410
