Traditionally, you can typically afford a home in California priced two to three times your gross income. This means that if your household income is $100,000, you can typically afford a home between $200,000 and $300,000.
However, this calculation isn’t the best method. Why? Because it doesn’t consider monthly expenses and debts. Those costs can make a huge impact on how much you can afford. Let’s say you earn $100,000 a year and have $1,000 in monthly payments for student debt, car loans, and credit card minimum payments. In this situation, you won’t have the same funds to pay your mortgage as someone earning the same income who doesn’t have those debts.
Before you start thinking about mortgage rates, put together a budget that tracks your ongoing monthly bills for all expenses: credit cards, car and student loans, work lunches, daycare, date nights, membership dues, subscriptions, vacations, savings, and so forth. See what’s left over to spend on home ownership in California like your mortgage, property taxes, insurance, maintenance, utilities, and community association fees, if applicable.
Your Down Payment
If make a down payment for at least 20% of the home’s cost, the mortgage lender may not require you to get private mortgage insurance. That insurance protects the lender if you default and costs hundreds each month. The higher down payment you make, the lower your monthly payments will be — which leaves more money to make your mortgage payment.
Conversely, the lower your down payment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment. Also keep in mind if home prices or interest rates are rising, and you wait to buy until you accumulate a bigger down payment, you may end up paying more for your home.
Your Overall Debt
Mortgage lenders in California usually follow the 43% rule. This means monthly mortgage payments covering your home loan principal, interest, taxes and insurance, plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 43% of your gross annual income.
Here’s an example of how the 43% calculation works for a homebuyer in California making $100,000 a year before taxes:
- Your gross annual income is $100,000.
- Multiply $100,000 by 43% to get $43,000 in annual income.
- Divide $43,000 by 12 months to convert the annual 43% limit into a monthly upper limit of $3,583.
All your monthly expenses including your potential mortgage cannot be more than $3,583 per month.
It’s possible a lender will give you a mortgage with a payment above the 43% line. If they do, consider carefully before you take it. Evidence from studies of mortgage lending suggest that borrowers who go over the limit are more likely to run into trouble making monthly payments.
Converting Rent to Mortgage Payment
The tax benefits of home ownership in California generally allow you to afford a mortgage payment, including taxes and insurance, of about one-third more than your current rent payment without changing your lifestyle. In other words, you’d multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.
Let’s say your rent is $1,500 per month. You should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of home ownership. However, if paying rent is straining your finances, you’ll want to buy a home that will give you the same payment rather than going up to a higher monthly payment. Always remember your home purchase will have added overhead that your landlord now covers, like property taxes and repairs. If there’s no room in your budget for those extras, you could become financially stressed.
Golden State Mortgage Can Help
Owning a home in California should make you feel safe and secure, and that includes financially. Be sure you can afford your home by calculating how much of a mortgage you can safely fit into your budget. Do your research and be ready. That way, when it comes time to buy your home you aren’t faced with financial surprises. You’ll go into the loan process knowing what you can comfortably afford.
At Golden State Mortgage, we are a California-based mortgage company. We want to help you through every step of financing your new home. Fill out the quick contact form or call Golden State Mortgage today at 1-800-536-8171 to speak with one of our California mortgage specialists and get a free good faith estimate.