How Many Times My Salary Can I Borrow for a Mortgage?

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Statistics show, at least in America, about 64 percent of people own their home. Home ownership rates are even higher in certain parts of the country. Depending on where you live, it can feel like everyone but you is either in their own home or actively looking for one. If you decide you’re ready to dive into the world of home ownership, that’s great. Renting is fine for a while, but it also has downsides. There are some questions you have to answer first. One of the biggest is determining how much of a mortgage you can get with your current salary. Read on to find out more about how your salary determines the amount you can borrow for your mortgage. 

The 40 Percent Rule

Many lenders abide by the 40 percent rule. In plain terms, that means you can’t get approved for a monthly payment that’s more than 40 percent of your take-home income. However, you also have to consider other debt obligations you owe when you’re calculating this. If you’re already paying $300 a month on student loans and $200 a month on credit cards, that’s going to lower the amount you can take out for a mortgage.

Let’s say you and your spouse are taking home a combined $80,000 annual salary. That’s pretty good, but you’re also paying off some pretty significant student loans. However, you think you might be able to pay off at least one of those loans within the next couple of years. This is where tools like a mortgage calculator can be quite helpful. You can input things like your income and amount of debt, and then find out your maximum mortgage amount should be.

However, know that ‘should be” isn’t always the same as will be. Not every lender operates the same way, and some are willing to take more chances than others. That can be both good and bad. On one hand, it might mean you can purchase the $300,000 house of your dreams. But if your income says you should only be purchasing a $225,000 house, you’re setting yourself up for trouble down the road. 

Other Factors to Conside

The old real estate cliche about “location, location, location” can also make a big difference when you’re trying to figure out what kind of house you can afford. As of 2018, the average commute time for the United States was about 26 minutes. However, that number varies depending on where you live. States like South Dakota and Wyoming have the shortest commutes by car, while Washington D.C., New York, and Maryland have the longest car commutes.

Washington D.C. is an expensive place to live, as are parts of New York and Maryland. Commute time can play a big role in how stressed you are every single day, so what should you do if you can only afford a house an hour away from your job? For some people, the answer is to buy that house and deal with it. Yet that’s not a great long-term solution. You can also shop around for a mortgage and see if you can get a house that’s a little closer to work. Even a 40-minute commute can seem great compared to an hour of sitting in traffic. 

If you live in an expensive area, you’ll be more tempted to push the limits of what you can reasonably borrow for a mortgage. Resist that urge. Living in an apartment 20 minutes from work is better than taking on too much debt for a house that’s a lot farther away. If you’re going too far over the 40 percent rule, take a step back and reconsider all your options. Maybe you need a bigger apartment, or maybe you can rent a house instead of buying. But don’t take on more debt than you can handle for a house.