Pillar 2: Income Ratios

In addition to good credit, a person looking to buy a home also must show sufficient income to support the monthly payment.Pillar 2: Income Ratios

What Is Sufficient Income?A suggested income distribution:

PITI What Is ItYour monthly housing payment is broken down into three elements:

1. Principal & Interest the monthly payment on the bank loan (or mortgage).

2. Taxes Home owners must pay real estate taxes to their local government for schools, police, etc.

3. Insurance If you borrow money to buy a house, the bank forces you to insure it.

Principal & InterestTo determine the monthly payment on a loan, we need to know the original loan amount (Principal), the annual interest rate, and the repayment period. Most mortgages are 15 or 30 year loans.Example: $200,000 @ 6% for 30 Years =$1,199.10 per month for the next 360 months.

Use a mortgage calculator to help you. Simply search Loan Calculator and many come up. I like Bankrate.com. That link is posted in this section.

TaxesReal Estate Taxes are determined by the town you live in. Generally they are expressed as a percentage of your homes value. For example, the City of Burlington taxes homes at 2.1464% of your homes value.

A $250,000 house has an annual tax bill of $5,366, or approximately $450 per month.

Real Estate Taxes are typically due every 4 or 6 months, but your mortgage lender will require you to save for them monthly.

InsuranceIf a bank is going to lend you $200,000 for a house, they want to know that if it burns to the ground, they will get their money back. So, they require insurance.Average homeowner rates are generally between $700-$1,500 annually. Or $60-$125 a month.

What determines your rate? Lots of things, including:Age of Home Is your roof, plumbing, electrical system modern?How close is the fire department and is there a hydrant close?Do you live in an area prone to natural disaster?Is your area a high crime area?Is their a pool, trampoline or other play equipment that may result in catastrophic injuries or death?

Even if you do not have a mortgage, you should always have insuranceits a small price to pay to avoid a major future expense. Accidents happen!!

PITI How Much Can You Afford?As a general rule, banks like to see people spending 30% or less of their monthly income on PITI.

An example:$250,000 house with a $200,000 mortgage at 6% for 30 years in Burlington, VT:

$1,199 (P&I) + $450 (T) + $100 (I) = $1,749 / Month

You would need to make about $70,000 a year to afford this.

A Few Other Thoughts on PITIIf you have a lot of other loans (cars, credit cards, etc.) that are costing you a lot, the bank will limit what they lend you. As a general rule, they want PITI + Other Loans