Home Buddies – Home Ownership Coach – Houston, Texas

Income Qualification to buy a House

How much house do I qualify for?

Good question. Here’s how to Pre-Qualify yourself.

***Important Note: This is here to figure out how much you qualify for ON PAPER, not necessarily what you would feel comfortable with. Don’t take on a monthly mortgage payment that is beyond your means!***

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Step 1:

What do you pay now in rent (or mortgage), and what could you go up to?

Own/Rent (Current):		__________________		/month
Desired Mo. Pmt:		__________________		/month

Keep these numbers in mind. Remember, DON’T GO BEYOND YOUR ABILITIES!

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Step 2:

Add up both borrower’s income. Ideally, any borrower’s income needs to be full-time work, unless a part-time job has been consistent for a couple years. This is TOTAL GROSS INCOME (ie: your annual salary divided by 12) and NOT what you bring home after taxes.

Borrower’s Gross Monthly Income				$	_______________
Co-Borrower’s Gross Monthly Income				$	_______________
Other Income				$	_______________
Total Gross Monthly Income				$	_______________

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Step 3:

Add up both borrower’s long-term debts. These are your monthly minimum payments on debts such as: Cars, credit cards, bank loans, student loans, child support with 6 or more months of payments remaining at closing.

Type: ________________	Payment: $___________
Type: ________________	Payment: $___________
Type: ________________	Payment: $___________
Type: ________________	Payment: $___________
Type: ________________	Payment: $___________
Total Monthly Debt Payments	$_________________

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Step 4:

Now we calculate the MONTHLY PAYMENT that you qualify for. The “Rule of Thumb” states that you can qualify for the lesser of EITHER 33% of your gross monthly income OR 45% of your gross monthly income minus your monthly debts.

Total Monthly Income x .33 =	$___________________
Total Monthly Income x .45 – Debts =	$___________________
Lesser of Step 1 & Step 2 =	$___________________

This is an estimate of the maximum monthly mortgage payment that you qualify for. If your debts are very low, you will likely be able to use the 45% calculation above.

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Step 5: (RULE OF THUMB)

This is where it gets a little tougher to determine a total loan amount and purchase price. Unless you can make a pretty fancy Excel spreadsheet, the best method at this point is to use this Rule of Thumb. Take your maximum monthly payment that we just calculated and add 2 to the second digit in your monthly payment. For example, if the payment was 1,300/mo, use 1500. Write it down. Now add two zeros to the end of that number. For example, that 1500 is now 150000 or $150,000. This is a very conservative estimate and you can start looking in the $150’s range.

Step 5: (GUESS & CHECK – COMPLICATED)

The other route is complicated and requires subtracting your monthly property taxes and insurance which gives you just your monthly “principle and interest”. That part would be simple if you already knew the value of the property but that’s what we are trying to figure out!

To get around this “circular argument”, use the rule of thumb above and use that number as a property value. Then, you could adjust from there. You can assume that your taxes and insurance will total about 3% to 3.5% of your property value per year. So to use the example above:

Example Property Value =	$150,000 (This is a guess!)
Monthly Taxes, Ins., etc. (3.25%/12) =	$400 (rounded)
Example Monthly Payment =	$1,300
Subtract MIP, Taxes, & Insurance =	$400
Monthly Principle & Interest =	$900

Now we use the monthly principle and interest and divide it by the “mortgage factor” which is just a fancy number used in place of an interest rate. It is based off the table below:

Monthly Principle & Interest = $900 DIVIDED by 5.25% Mortgage Factor = .00552 MAXIMUM LOAN AMOUNT = $163,000 …It turns out we can qualify for a little more than $150,000. So we need to adjust our tax calculation: Example Property Value = $160,000 (new guess) Monthly Taxes, Ins., etc. (3.25%/12) = $433 (rounded) Example Monthly Payment = $1,300 Subtract MIP, Taxes, & Insurance = $433 Monthly Principle & Interest = $867 So now we have adjusted our taxes to the higher property value: Monthly Principle & Interest = $867 DIVIDED by 5.25% Mortgage Factor = .00552 MAXIMUM LOAN AMOUNT = $157,000 With a little more exact calculations, it looks like we qualify for around $160,000!	Rate	Factor
	5	0.00537
	5.125	0.00544
	5.25	0.00552
	5.375	0.0056
	5.5	0.00568
	5.625	0.00576
	5.75	0.00583
	5.875	0.00591
	6	0.00599
	6.125	0.00608
	6.25	0.00616
	6.375	0.00624
	6.5	0.00632
	6.625	0.0064
	6.75	0.00649
	6.875	0.00657
	7	0.00665