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