Barbara Corcoran: How To Calculate How Much House You Can Afford
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Angela Mae
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Cory Dudak
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Do you want to buy a house? Start by figuring out how much house you can afford. According to Barbara Corcoran, Shark Tank host and real estate expert, you can afford up to four times your annual salary. However, you’ll also need a 20% down payment.
“The rule of thumb is, you should spend roughly 30% of your take-home pay on your housing costs, which includes the mortgage, the property taxes and insurance,” Corcoran said in a recent interview with CNBC. Why? “Because that” what the banks are looking for,” she said.
If you think you’re ready to buy a house, here’s exactly how to calculate the amount you can afford — and some quick tips to making sure you don’t go over your budget.
Calculating How Much House You Can Afford on Your Income
According to Corcoran, you should spend about four times your annual salary on a house. Say you earn $100,000 a year. That means your total home purchase price gets capped at $400,000. If you earn $50,000 a year, you can afford a home that costs $200,000.
“You should multiply your salary by four, and that’s generally what you can qualify for,” she said.
But remember the down payment. You should ideally have 20% down, as well. On a $400,000 home, that’s an $80,000 down payment. On a $200,000 home, that’s a $40,000 down payment.
FHA Loans Are an Option
Saving 20% for a down payment isn’t feasible for everyone. According to the National Association of Realtors, the median down payment across all buyers is 18%. For first-time buyers, it’s just 9%.
If you can’t save that much, you still have options — namely an FHA loan. These loans typically have fewer requirements than conventional mortgages. You could potentially qualify with as little as 3.5% down, depending on your credit score and other factors.
“The problem with the FHA loan is your closing costs are going to be slightly higher,” said Corcoran. According to her, most loans have closing costs of about 3.5% of the property purchase price. FHA loans require additional insurance, which can tack on an additional 2% to closing.
Pay Attention to DTI
Your DTI, or debt-to-income ratio, is the percentage of your monthly income (gross) that goes toward your monthly debts. Try to keep this as low as possible, because it can affect your mortgage affordability.
“A general guideline is that borrowers can afford a mortgage if their DTI ratio is between 35% and 50% of their gross monthly income, though this range can vary depending on the loan program and other factors,” said Mitch Rudder, Vice President of Mortgage Sales at Idaho Central Credit Union.
Calculate your DTI by dividing your total monthly bills by your gross monthly income. Say your gross monthly income is $10,000 and your monthly bills total $3,000 — your DTI is 30%.
Monthly Rent Payments Matter, Too
If you can afford a certain monthly rent, you can probably afford a similar mortgage.
“A great way to get a realistic idea of what you can afford is to start with your current rent,” said Danielle Andrews, Real Estate Broker at Realty ONE Group Next Generation. “If you’re comfortably paying $1,500 a month in rent, there’s a good chance you can afford a similar mortgage payment.”
Be sure to include things like interest, taxes and insurance in that monthly mortgage payment.
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