How Much Mortgage Can I Afford?
Video Transcript: How Much Mortgage Can I Afford?
0:00 Thanks for stopping by. Again, this is Phil, Foundation Wealth Planning and I got a really good topic today that I get questions on is how much mortgage can I afford? 0:10 So we're going to go through that with some basic ratios and kind of talk through a little bit. I hope it's helpful. 0:16 So again, as a reminder, as everybody with the video says, but it truly does help. If you like it, the video please. 0:24 Like it, subscribe to the channel, follow me on Instagram, YouTube, all that good stuff you know, and share it around. 0:31 So that way this, you know, these helpful videos, do you find them helpful? They can help other people.
So when we're talking about a mortgage a lot of people are wondering, you know, what's a, what's a reasonable amount that I can afford. 0:45 Now there's a couple of different ways to look at it. Let's start with this. What the bank is going to approve you for. 0:52 Typically they use two different ratios when they're looking at your situation to see, are you going to qualify? And that would be the front end ratio or the back end ratio. 1:02 So the front-end ratio is simply if you take the mortgage payment plus the interest plus the tax and insurance. 1:13 Take all four of those components and make basically your mortgage payment. That's what people call it, because you send tax and interest escrow. 1:19 So that combined all makes your mortgage payment. If that payment is going to be 28% or less than your annual gross income, then oftentimes you're going to get approved for that loan. 1:34 Okay. So a little bit of math. That would be if you make a hundred thousand dollars, 28% of that would be $28,000.
1:44 So that is the most that the bank normally will loan you for your mortgage payment. So if you take $28,000 and you divide that by 12, that's a $2,300 mortgage payment. 1:56 And that's, that's fairly typical. And so the, the way the payment's going to come up is going to depend on. 2:02 On what the purchase price of the house is and how much money you're going to put down on the house. 2:08 You're going to have a down payment. Typically you, you know, want to have 20% is what most people recommend to get the house without mortgage insurance. 2:19 If you get less than that, you're going to have mortgage insurance and you're going to want to account for that in your total payment. 2:25 But. You don't want to be at least 10% ideally. But you know, certainly 20% is going to help out but somewhere in that ballpark and you can use a mortgage calculator to plug in how much money you're going to put down and you know, try to figure out what your payment's going to be. 2:40 And that'll, that'll help project out how much of a mortgage you get and how much of a house you can purchase.
2:46 So you kind of have to back into it a little bit. Now the back end ratio is going to add in other debts. 2:53 So if you have other debts, such as a car payment, you know, credit card loans, things like that, that is going to hinder you. 3:01 Now they can, they can add that stuff in. And basically if you take whatever your payments are month, this is so you have $500 a month in other debt payments. 3:11 Well, that's going to get added to whatever your projected mortgage payment is and that total number has to be less than 36% typically. 3:21 Now again, mortgage companies might have slightly different ways. They calculate some of this stuff or slightly different guidelines, but that's a pretty typical number is 36%. 3:31 If you take your mortgage, tax insurance and interest and add that to whatever your payment is for your debts, your other debts, that's gotta be less than 36%. 3:43 So that's typically what you're going to look at.
Now, my question is who really needs to spend that much on a mortgage? 3:52 Because if we do some of the math, it's going to make living your life much more difficult if you max out these numbers, right? 4:01 So a real estate agent and a mortgage broker might push you to kind of hit higher on that because they certainly get compensated. 4:09 I think most people are good people and they're not going to try to push your limits too far. But they certainly will say that they could approve you for more. 4:16 So maybe they want you to look at more. But if you just take round numbers on a percentage, you'll see that there isn't a lot left over if you do a 28% of your. 4:28 Gross income to your mortgage payments. So if we just say you take a hundred thousand dollars and so you do 28% of that to the mortgage, right? 4:39 Let's just say you max it out. Well, then you obviously you're going to want to put money into retirement you know, ideally 10 or 15%, more as you can, but let's just say 15%. 4:51 So want to be generous. So say you want to do 10% and kind of hit that tithe number. Well, then it's gross. 4:58 So we haven't taken taxes yet. So let's just say that number is 20%. So if you add all those together, right? 5:05 You got 28% plus 15% plus 10% plus 20%.
What's that number? That's 73% of your gross income. And we haven't even gotten to living yet. 5:21 So at least 27% of your income will be there for things like your car, you know, transportation, home repairs, kids, travel, groceries, utilities. 5:35 So in this example, that would lead you $2250 per month, right? That would be 27% of $100,000. So you can see, it could be doable to live on that 2250, but I don't know about you are a lot of that would be done by groceries in our house. 5:57 That's going to be hard to make it work. So keep that in mind, even though you could get approved for more, it's just going to limit your flexibility. 6:07 You're not going to be able to, you know, travel as much. You're not going to be as generous. You're not going to put as much into retirement. 6:15 So if you get that bigger house, you get that bigger mortgage payment, you have to look at what you're sacrificing and what you're giving up and figure out what's important to you from that perspective. 6:26 And so, you know, you could. Certainly do it that way, but it's going to make life a lot more difficult. 6:32 So keep that in mind. I hope that helps.
Certainly trying to get that as low as you can and really figure out what you really need because again, the standard of, you know, cost of everything has gone up, but also standard of living that's gone up significantly. 6:46 If you look at sizes of homes, you can Google this. I was just clicking around on it, but it appears to me. 6:53 Because I knew houses were smaller back in the day, but it looks like about 19, in the 1950s, the average home was about a thousand square feet. 7:02 And today, the average home is about 2,500 square feet. So yes, we used to say, Hey, you could, you could survive a lot better on one income back in the day. 7:14 And there are other factors that contribute to that, but. Some of the factors that we're buying bigger houses. So I hope that helps you find a house that's reasonable within your budget that is going to allow you to still live your life, be generous, save for the future. 7:32 And don't necessarily worry about what the maximum with the bank will give you because we just went through that and that, that can make life pretty hard.
7:42 So I encourage you to get on a mortgage calculator. Kind of use some of the tips that we had and then try to scale it back as much as you can and see what you can get for that. 7:50 And I know costs of living and houses are more expensive in some places than others. But the math is the math and you're going to have a hard time making ends meet otherwise if you get too big of a mortgage. 8:00 So anyway, please let me know if you have questions on any of that. If you have additional. Topics you want me to cover please feel free to email me or send me a message. 8:11 Would love to answer some questions that are relevant to anybody watching these videos. So thank you all for your time. 8:19 Have a good day and God bless.
*This is no financial advice, this is for education purposes only. Please talk to a financial professional about your specific situation.
Phil Francois, CFP®
Foundation Wealth Planning
https://www.foundationwealthplanning.com/contact-us
phil@foundationwealthplanning.com