A mortgage is the largest loan you will ever take out. A mortgage extends for a minimum of 15 years and a maximum of 30 years. To take on such a large debt, you must know your financial capacity and future responsibilities.
Why should you want to know your yearly income to pay your house payment?
If you take out a mortgage, you must make monthly payments for the next 15 to 30 years. In that case, your monthly profit should have a provision for the mortgage payment and other monthly expenses. Therefore, you must estimate your annual earnings and then take out a mortgage that fits your budget.
How can this information help me to arrive at the amount that I can take as a mortgage on my house?
Simple economic theory states that your monthly mortgage payment, including principal and interest, should not exceed 25% of your gross monthly income. Add to this real estate taxes and property insurance which adds another 3 to 6 percent. In addition to this, you have your food and other monthly expenses and federal taxes that you pay.
Example
We assume that you will make at least 20% down payment on the mortgage plus 2-5% as closing costs. Visit any home financing website and they will give you an indicative cost per thousand dollars for a 15 or 30 year mortgage at different interest rates. So if you finish a home for $ 150,000 and make a down payment of $ 30,000, then 9% for a 30-year mortgage, the monthly payment using the figures in the table provided equals $ 8.05 per thousand. This means a monthly fee of $ 966 or $ 11592 per year. Since we assume this is 25% of your gross income, you must earn at least $ 46,368 per year to pay off this mortgage. Similarly, if you think you can rent a larger house, you can opt for a 15-year mortgage with a higher monthly payment. Plus, the equity in a 15-year mortgage builds up faster, so you can choose to refinance or move to a bigger home.
How to Calculate Your Annual Income to Obtain an Affordable Mortgage
You can generally qualify for a mortgage that is twice your annual income. However, lenders evaluate your net worth, your responsibilities, and the costs of owning the new home before approving the mortgage.
Now consider that your monthly expenses include mortgage payments, property taxes, insurance, and maintenance costs. You may need private mortgage insurance if your down payment is less than 20% of the mortgage amount. It is usually 0.5 to 1% of the mortgage amount and a monthly deduction. This amount of insurance can increase marginally over the years.
Next, calculate your assets, including income, savings, pensions, and real estate equity. Your liabilities include auto loans, monthly expenses, and credit card loans. Your emergency funds must include savings that can provide you with six months of life without any income.
Your net worth is the net value of your assets less liabilities. Subtract emergency funds from equity to get an amount that is available for lost costs and a down payment. Next, find the sum of your annual expenses and operating costs, minus your income. Then add the cost of rent and insurance to get an amount that you can spend on your home in one year. Therefore, your annual income should be almost double this amount.
Advantage of using a mortgage calculator
As explained above, the calculations are detailed and you should not make any mistakes. Therefore, it is best to use the affordability calculators available on most financial websites to estimate your annual income.
Disadvantage of not using a mortgage calculator
You’ll end up buying a bigger home and then taking out a huge home loan that you can’t afford. You can default on your payments, which would seriously affect your credit rating. This will hamper your future credit chances and affect your credibility with lenders.
