George Kamel - How Much House You Can ACTUALLY Afford (Based On Income)

Episode Date: September 8, 2023

Buying a house can come with a lot of emotion and sometimes bad decisions. Today, you’re going to learn how to figure out how much you should spend on a house based on your income so you can confidently reach your homeownership goals. Links: Ramsey Mortgage Calculator EveryDollar Budget Deal: I love a good deal, when you sign up using this link , I’ll hook you up with a 14-day free trial and $15 off your first year of the premium version of EveryDollar. Ramsey Solutions Privacy Policy Learn more about your ad choices. Visit megaphone.fm/adchoices

Buying a house in today's world comes with a lot of emotion. Seriously, we're seeing average home prices reach some of the highest prices ever recorded and interest rates doubling, even tripling from where they were just three years ago. And it's causing some people to spiral and make irrational decisions, like buying cereal-themed clogs. Y'all, pray for these people. In this housing market, people are getting fed up, desperate, and resorting to taking on mortgages they can't afford with little to nothing down.

All the while, still loaded with other types of debt, and anemic savings. And like the single seniors competing on the upcoming season of the Golden Bachelor, you might feel like you don't have any other options. And that's why today, you're gonna learn how much house you can actually afford. I don't know why I said it so happily, because this might be a very depressing episode, and I'm very aware of that,

but someone's gotta tell you the truth to your face, right? At least that way, you know exactly where you stand and what it's gonna take to reach your home ownership goals. But first, show me that you accept this rose with a like and subscribe. and share this video with someone who needs to know it's never too late to fall in love again. I just don't want to go home. Now, how much house you can afford

really depends on the relationship between your income in the mortgage. They need to work together like stars and stripes, like pen and paper, like fish and chips. God bless the Brits, love me some chips. Chips. Now, figuring this out is key because most lenders will dish out mortgages

that are way more than you can actually afford and that will keep you in debt decades longer than you have to be. and should be. So to keep that income to mortgage ratio healthy and balanced, I recommend a total mortgage payment that is no more than 25% of your after-tax income. And if you're wondering what's included in that 25% payment, it includes principal, interest, property taxes, homeowners insurance, any HOA fees, and private mortgage insurance or PMI if it applies. So let's say you earn $5,000 a month after taxes, but before other deductions like health care or 401K contributions. In Tennessee, that would be

about a $75,000 yearly salary, which, by the way, is just above the national median household income. So according to the math, 25% of 5,000, your monthly house payment should be no more than $1,250. Now that you've got that magical number, let's figure out how much house you can actually afford. And to do this math, I'm going to use my handy-dandy mortgage calculator at ramsysolutions.com. And if you want to follow along, I will link it below. Let's do this. So let's start on the low end, and I know for you that live in a high-cost living area, these numbers are insane, but for people who live in other parts of the country, which those people are people too, did you know, they can find homes that are reasonably priced still in today's world.

So let's say the home is going to be $162,000, and you've got 10% down. That means your payment is at $1,588. Now, that's assuming a 6.5% interest rate on a 15-year fixed-rate conventional loan. A lot of numbers thrown out there. But let me tell you about the type of loan you want to get. There's so many out there and there's so many mortgage traps and I've done some videos on this, but the key here is sticking to a 15-year fixed rate conventional loan. This is the best bang for your buck.

It's going to have a lower interest rate and you're going to pay off your debt in half the amount of time. And remember, the key to everything I teach on this channel is that you want to get out of debt ASAP and stay out of debt. And so a higher payment means you pay it off in less time. Good? Capiche? We good? Good.

Awesome. Let's move on. So with this house at $162,000, we're not quite at that $1250 payment. So what are the numbers we can tweak? Well, we can't really adjust our property taxes, that's set. We can't really adjust our homeowners insurance if we shopped around, like with our friends at Zander. And we will have PMI. Now, to avoid that private mortgage insurance, we could increase our down payment with a little bit of patience, hard work, roll up the sleeves, get the side job, wait another six months.

And maybe we could put 20% down instead. Let's see how that changes our numbers here. Look at that. We are so much closer. At 1325, we are just $75 off of hitting our goal. Again, the only number we can really tweak here is our down payment. So what if we put 24 so close? 25%. 25% down on a $162,000 would grant us the magic $1,250 payment. Now that's on a $75,000 a year salary. So how much house you can afford largely depends on how much down payment you have and your income. And so if these numbers aren't adding up, you've got to adjust your expectations, you've got to adjust your patience, adjust your timing, maybe you get a condo or a townhome instead of a single-family home, maybe you're 40 minutes out. Now, I'll be honest, here in Nashville, 160 grand isn't going to get you very far in Nashville or the surrounding areas, because the housing market here is basically a hunger game for suburban millennials. What's with your beard? Now, there are homes in the U.S. that you can get for that price. For example, a few hours west in Memphis, there's a few good options in the 162,000.

and range. But if you're in Nashville or a market like it, the fact that making $75,000 won't get you a home you can afford, seriously stinks. And while that stench like the hot trash smell of Taco Bell breakfast is very real, I want to invite you to cleanse your palate with this thought. Renting is not a waste of money. Despite what you've been told. And unlike those lucky charms crocs, renting will not make you any less of an adult. Okay, renting is a completely viable option and you should feel totally at peace doing it. As long as your rent is also no more than 25% of your take-home pay. And while you rent, you can continue to save money for a bigger down payment and work on getting

your income up, which will help you afford a house at a higher price point. Yes. Okay, so we know what a $75,000 salary will get you. Let's see what you can afford if you bump it up to $100,000. You know, that idealic six-figure amount that is actually more than what about 65% of Americans make. Now, here in the great state of Tennessee, that $100,000 comes out to about $85,000 after taxes if you're married filing jointly, meaning that your monthly take-home pay would be

around $7,000. And if you're wondering, how is it so high where I live? Well, we don't have income tax here in Tennessee. So that's, that's why. I thought there was going to be a cooler answer there, but that's really it. Let's take 25% of that $7,000 take home pay. That comes out to $17.50. So that's the total mortgage payment you're looking for. So let's go back to this calculator and see how much house we can afford now. With, let's say 20% down, that's our goal here. So with 20% down, we are still below that 25% thresholds, which means we can bump up our home value that we're looking for. Let's go to 220. Boom, right there.

Now, that's something we can work with. So where I'm at in Nashville, $225,000 won't get you a brand new four bedroom and a popular neighborhood overrun with doodle varieties, but it will get you a solid condo or townhome within 30 to 45 minutes of the city. Now, in a less competitive market, like Cleveland, Ohio, there's tons of great home options at that price. And from what I've heard, Cleveland Rocks. All right, let's up the game. Let's say you've got an amazing $150,000 household income. Maybe it's dual incomes with two working spouses, and you're just killing the game.

So after taxes, your monthly take-home pay would be around $9,300. So 25% of that would be $23.25. So let's play around with those numbers and see how it helps us afford more home. Let's bump this bad boy up to $300,000 and see if we can stay in that $2325. And we are so close, so let's bump it right down to $2.95. And we are there. 2313 monthly mortgage payment with 20% down on a $295,000 house with a 15-year fixed rate conventional mortgage at a 6.5% interest rate.

There you go. So we have up the game now. And I know what you're thinking. You're telling me I've got to make $150,000 to afford a $300,000 house. Right now with the current state of the housing market and interest rates, yes. So that's the hard truth of the numbers. And, you know, that might get you a pretty decent spot in areas that aren't considered high cost of living or ultra-high cost of living, like New York City or the Bay Area.

And truthfully, only mega-rich people or city rats make it there. Sometimes they're one and the same. But here's some silver lining. You can get a nice four-bedroom three-bath and a spacious yard for $300,000 in, wait for it, Ankeny, Iowa. You know what else you can get in Ankeny? Entertained. To quote the Ankeny Chamber of Commerce,

Ankeny is a town brimming with entertainment of all kinds. Brimming. Brimming with entertainment. Okay, so we've looked at figuring out how much house you can afford in terms of mortgage payment, but that's definitely not the only cost to consider when purchasing a home. I mean, those custom draperies don't just buy themselves. Not that I would know. I don't go custom.

I get them on Amazon. It's way cheaper. So first, you've got to save for the down payment. And I'm talking a down payment with some Kramer-level chest tear here. Not some scrawny 3%. Get out of here with that. your down payment makes a massive impact on the home price you can afford. So the more cash you put down, the less money you'll need to borrow.

Bigger equals better when it comes to down payment. Now, if you're a first-time home buyer, a down payment of 5 to 10% is okay. But remember, you'll have to pay private mortgage insurance, or PMI, if you put down less than 20% on a conventional loan. Now, don't freak out here, but a down payment isn't the only cash you're going to need. You've got to fork up some dough for what we in the biz call closing costs. Closing costs. You don't have to buy a home, but you can't afford this one.

I never heard that song before, and once I heard it, I did not care for it. Now, closing costs can run about 3 to 4% of the price of your home. And they cover things like your home appraisal, home inspections, loan origination fees, pulling credit reports, real estate attorneys, home insurance, property taxes, you know, the fun, exciting grown-up stuff. So if you're purchasing a $200,000 home, multiply that by 4%, and you'll get an estimated closing cost of around $8,000. So add that amount to a 20% down payment of $40,000,

and the total cash you'll need to purchase your home is $48,000. It's fine, just sell your Beanie Baby Collection. That should cover it. I mean, a well-kept weenie with the tags, currently going for around $2,500. Mint-conditioned scoop could scoop up $50,000. Now, who's paying $50,000 for a bean-filled Pelican toy? I don't know.

I'm not here to judge. None of my business. I didn't ask, and I don't want to know. Now, if you don't have the additional $8,000 for closing costs and don't have any beanie babies to sell, you're simply not ready to buy a home. You can't afford it yet. Okay, the keyword here is yet. So hold off until you've saved up the extra cash or shoot a little lower on your home price range. But whatever you do, do not let the closing cost keep you from making the biggest down payment possible.

Now, if you want to check out that mortgage calculator I was using, knock yourself out. It is free, and I will link it below. You can also check out the Ramsey Home Buying Hub, where you'll find the mortgage calculator plus a ton of other articles, and even real-life, real estate agents to help guide you through this process. And this is where I personally go when I have a home buying question, so I'll link that below as well. In the meantime, let me know in the comments your thoughts on what you can actually afford. I would love to know and share the wealth.

Send this video to a friend who obsessively checks their home's value on Zillow, or that renting friend who doomskroll Zillow late at night, wondering if there's still hope, tough times out there, y'all. Happy or sad, Helmunting. Thanks for watching. I'll see you guys next time.