Every headline is telling you it’s a must these days so let’s do some basic math and check out some current houses on the market to see what’s true and if it’s true for all areas.

Let’s look at multiple states that are notoriously expensive and affordable.

The answer depends where you live. In expensive states, yes. In the midwest for a modest home that’s cute and cozy, no. How much you actually need depends on many factors but the average rule is that your total DTI should not exceed 36% of your income however there are loans and clients who can qualify for even 45% of total DTI with their new payment.

For example: If buyer comes to me for a loan and they make about $80k per year combined income, each making about $40,000 for the year, then I can preapprove them based on the simple calculation of 75k/12 which is $6,250 per month and with an estimated DTI of .36, they’re mortage payment goal is about $2,250. This amount is regardless of rate so how much of a home price depends on rates. Lenders do not approve on home price but total monthly payment so if rates are high, this won’t be much of a home, but if they’re low this could be an expensive home. A $385,000 house with 5% down with rates around 7% is about $3344 but if rates were say 5%, then the house could be around $450,000 which is a $65,000 difference for almost the same payment and credit file. It depends on current rates.

Keep in mind though this is for a preapproval. We still have to pull a complete credit file for score, deliquincies, other bills, foreclosures, etc. and then we dig deep for all of your debts, current payments, loans, etc and look into alimony, judgements, and more in the actual approval process. This can really change your numbers and why there is a back end ratio, which factors all of your major monthly obligations and mortage amount, to determine your DTI and final approval amount. This is underwriting and it’s an in depth analysis of your job, history, future, and so much more. This same client could get approved at 45% and be approved for around $2,812 but so much goes into final approval. If you have car payments and an averaged score under 750, then you might not get approved as high of a ratio. Remember too, many buyers get approved for MORE than they could afford which is why you may have heard of lenders recommending you don’t surpass 28%. For this client, that’s only a payment of $1,750 but judging by their other expenditures not considered in approval, this might be far more comfortable for them and more realistic when they have 3 kids to feed who are also in sports and they like to go do things like eat out and go to Disneyland.

The best thing to do is always look at your own bills, and see what your comfort zone. Can you afford $2,500 without being strapped every month? If it makes you even wince, don’t do it. That’s a tough payment for many Americans and you have to remember quality of life, emergencies, inflation, insurances, other bills, fun stuff, kids, etc. The reason many lenders suggest not shopping for a home more than 28% of your income is because of all the other life expenses to still calculate and we don’t want you living so tightly you are stressed every single month. That’s not a way to live. But let’s say you live in an expensive area where houses are selling for an average of $650,000 and payments are around $5700, then yes, you would need to make nearly $16,000 per month, which is almost $200,000 per year!

If you have average credit and income, expect to pay up to 7.5% interest and you need to currently shop for homes under $300,000 which can be done in many places. This includes property taxes, PMI, insurance, and total payment regardless of state.