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What Income Do You Need To Buy The Average US Home? This Formula Shows You It's Lower Than You Think - YouTube
Channel: Win The House You Love
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Hey, Kyle here with winthehouseyoulove.com.
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As the median home price
continues to increase.
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You might be wondering how much
income do I need to actually qualify.
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For a loan and how in the
world does a lender figure out
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how much home you can afford.
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You're looking to apply.
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You go talk to a lender and they're
like, here, you can afford this much.
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We'll give you a loan for
this max purchase price.
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Where in the world did
they get that number?
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I'm going to show you all the math
and what goes on behind the scenes.
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So you can understand where they're
coming up with this number, so you can
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help change it if you need that to
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inrease.
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All right.
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And so I'm going to show you based on
the four main loan types, conventional
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FHA VA, and USDA, the minimum income
needed to afford the median home
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price, which is $347,500 at the time
of the recording of this video.
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So here's the scenario that we'll
be walking through we're of course
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going to be the median home price,
we're going to do a 3% rate.
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So each loan is probably going to have
a different interest rate with it.
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We're just going to try to keep it all the
same 3% interest rate across the board.
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We're also going to do
minimum down payments.
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So conventional 3% down, FHA 3.5%,
down VA 0% down, and USDA 0%.
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And then we'll do 1.1%
and annual property taxes.
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.35% in homeowners insurance,
we'll do zero homeowners association
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fees and then $500 a month in debt.
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And so these monthly debts,
minimum, monthly debt payments.
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Things like a car loan, a
credit cards, student loans.
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It does not include rent
utilities or any other types
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of expenses or bills like that.
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And I'll explain why I'm here in a minute.
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And so again, we're going
to be using $347,500.
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Something interesting to note
is that the median across all
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home prices is the $347,500.
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However, depending on the loan
type, the median actually changes.
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So with conventional loans, the
median price for people purchasing
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with conventional is $386.6k,
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with FHA it's $255.4k with
VA it's $324.3k and USDA, unfortunately
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doesn't have any data on this, but
we'll cover a USDA loan as well.
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So how do lenders find your
maximum purchase price?
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It's mainly through this number
called the debt-to-income ratio.
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Basically it's a percentage that says
how much of your monthly gross income.
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Is debt payments is the
minimum monthly debt payments.
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And this is going to be
adjusted by the risk profile.
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So we're going to be
looking at the maximum.
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Each loan has its own maximum debt
to income ratio as a percentage.
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However
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If your credit score is lower.
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If the loan is riskier to the
lender, then that maximum is
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actually going to be lower for you.
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So we're going to assume the
risk profile is at its best.
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Maybe you have a extremely high
credit score and there are no
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other risk profiles in the loan.
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And so we're going to just look at
the maximum debt to income ratio
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so we can see the absolute middle.
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Income required here.
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All right.
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And so there are two
different debts income ratios.
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There's a front end and a back-end
front-end debt income ratio right
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here is the monthly housing payment
divided by the monthly gross income.
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And I'll explain why it's gross here.
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In a minute, the back-end that's
income ratio is the same, except
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we're going to add in there the
monthly minimum debt payments.
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And so the lender basically wants
to see what portion of your monthly
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income is being used towards either the
future mortgage payment or the future
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mortgage payment, plus the debts that
you're already paying minimum monthly.
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So why in the world did
they use gross income?
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We only get to take home our after
tax pay and use those dollars.
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So why gross?
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The reason why lenders want to use gross
is because net income can be manipulated.
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And then that wouldn't actually be
fair for everybody with the gross
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income lenders have already factored in
taxes into the debt to income ratios.
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Okay.
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So they've already factored
in the taxes that you pay.
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If we were just looking at net income,
it'd be very easy for somebody to
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manipulate their W-4 to change
withholdings with how much tax.
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Are taken out or there's other
withholdings that are included inside
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of a pay stub that you might have
things like garnishments or child
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support or retirement accounts.
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There are those things in there as well.
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So you're using net income when
you figure out if you can afford.
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Not what a lender does to see how
much loan they'll give back to you.
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The debt to income is what the
lender uses to determine your
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risk of paying back the loan.
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Okay.
And so it's very important to remember.
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It's not what you should use to determine.
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If you can afford a home, you affording
a home is about your budget and what
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you're comfortable paying every single.
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Not with the lender tells you all right.
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It's never, you never want to
go with the lender just says,
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here you can afford this much.
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The lender is only looking at how risky
it is to give you a certain amount
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of money, a maximum loan it's up to
you to decide, should I take this on?
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Is this a good decision or not?
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Because only, your financials
only, you know the money that you have
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every single month that you're
using and what it's going towards.
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So a lender is not.
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Your financial advisor, please don't
make them your financial advisor
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because they are not all there doing
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As they're giving you a loan
and they're telling you how
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risky they think that loan is.
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And they're going to say, this is what
we're willing to give to you, just
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because they're willing to give it to you.
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Doesn't mean you should take it.
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And so what we're going to do is
we're going to look at maximizing
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the debt to income ratio as an
exercise, not as a recommendation,
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I'm not recommending you do this.
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What I'm doing is I want to show
you the maximum debt income ratio
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so we can see the minimum income
needed for each of these loans.
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Again, as an exercise here, Next step
is, go ahead and choose your loan all for
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unscreened, conventional FHA, VA USDA,
pick your loan, and I'm going to walk you
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through the math to figure out what is
the minimum income needed for each loan type.
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