Buying a home is an exciting step in life. It will be our home for a long time, perhaps forever, and the decision must be made by analyzing every detail. On one side, the house must fulfil our tastes and needs. But on the other, we find ourselves limited by a budget according to our salary.
Next, we explain three steps to establish an acceptable price range according to your income for the future acquisition of a new home.
Three steps to know how to choose a house according to your salary
Setting a realistic expectation is fundamental for the process to be emotionally satisfying and reach the desired result: buying the most suitable home for you, also in terms of price. To accurately calculate that possible budget and find out which house to buy according to your salary, it is advisable to take three steps:
1. Calculate income
Gross monthly income, when taxes and deductions have not yet get discounted, is the figure that allows banks and stakeholders to assess the situation. Therefore, it's essential to calculate how much money is available every month. Consequently, depending on the number of payments throughout the year, it is necessary to carry out various accounts.
First, it is necessary to calculate what the average monthly salary is:
- If you receive 12 equal payments throughout the year, each payroll is associated with the average monthly salary.
- If, on the other hand, you have 14 payments in a year, you have to add them to obtain the annual salary and divide the total by twelve, to find out how much would correspond to each month. For example, if € 1,200 are charged every month plus two payments with the same amount, the average monthly salary would be: 1,300 * 14 = € 18,200 (annual salary) 18,200 / 12 months = € 1,516.67.
- If the figure we have is the annual salary, we will only have to carry out that last operation: divide by 12.
- If you have an hourly wage, you should try to calculate the average number of hours worked weekly and multiply the resulting number by the rate charged per hour, to estimate what gets charged each week. Thus, if you earn € 10 / h and work 35 hours a week on average, the average weekly wage will be 10 * 35 = € 350. Then we multiply that data by the number of weeks charged per year. That way, you'll obtain the annual salary, which, as in the previous cases, must be divided by 12 to arrive at the average monthly income. In this case, if you work all year long, that is, 52 weeks, the average monthly salary is as follows: € 350 / week * 52 weeks / 12 months = € 1,516.67
To all this, you have to add that irregular income you may get by working extra time, shifts, bonuses, etc. Due to its irregularity, it is more difficult to form a clear expectation. However, if this data is similar each year or maintain a tren, it can get incorporated into the estimation. Just add up all these foreseeable income in a year and then divide the amount by 12. The resulting value can be added to that average monthly salary to estimate the average monthly wage.
2. Assess the debt
Debts associated with the credit card, loans requested for different reasons, pending payments for the purchase of the car or tax liens count.
We should consider that, generally, when assessing whether to grant a mortgage or not the 28/36 rule is used. This rule says that a family should not spend more than 28% of their monthly income in the payment of the house and not more of the 36% to pay the sum of debts. Within that 28%, we have to include taxes and insurance associated with the home purchasing.
Suppose we start with a monthly gross income of € 2,000 and the house that we want to buy costs 230,000. Let's say that, with the added expenses such as VAT on the house or processing and purchase costs, which ranges between 10-15% of the price, it remains at 240,000. So, if you already have 20% of this amount (which can be a condition when applying for a mortgage), check the following formula to know if you accomplish the 28% condition of the rule:
Total monthly household expenditure / Average gross monthly income <0.28
Although we already know the gross monthly income, to learn the monthly cost of the property, it is necessary to delve a little more into the aspects that influence the mortgage. Thus, for the proposed case, the requested mortgage will be € 200,000, to which it will be necessary to add some other numbers such as interest.
At this point, we have to consider that the Euribor has been at a minimum for some years, which means that the variable rate could go up but not go down, a risk that is better to avoid when contracting mortgages with fixed interest.
Let's say that the interest finally achieved was a fixed one of 5%. In this way, the details of the mortgage would be the following:
|Interest rate (30 years, fixed rate)||5%|
|Loan + total interest||386,512|
|Total annual payment||12,884|
|Total monthly payment||1,074|
To this total monthly cost, it would be necessary to add some more expenses such as insurance and related taxes. Let's imagine that the final payment for each month stays at € 1,200. In this case, when checking the previous formula: € 1,200 of expenses / € 2,000 of income = 0.6. In this case, we would be allocating 60% to housing expenses, which is more than double what we stipulated in the 28% rule. Therefore, that house would be exceeding the limits of the budget appropriate to the salary considered.
On the other hand, if the gross monthly income were € 5,000: € 1,200 of expenses / € 5,000 income = 0.24, that is, 24%. And therefore we would be facing an option-adjusted to the salary available.
And if there are more debts in addition to the mortgage, the formula to follow is very similar:
Total monthly housing expense + expense for other debts / Average gross monthly income <0.36
3. Analyze other monthly expenses
Despite the previous analysis, the bank can grant the mortgage. But it is also advisable to make sure that the rest of our monthly expense will allow us to have the amount that will imply to face it.
It is necessary to consider the monthly sum of expenses considering everything from food and clothing to transportation, entertainment and personal care. To these, we must add others such as electricity, water, or the Internet. And we cannot forget those irregular ones that we will have to divide by 12 to establish how much they would mean monthly.
Once we have added all of them, the result can be highly variable depending on the family and their lifestyle. In any case, we should accomplish the following:
Sum of monthly expenses + monthly housing expense <monthly income
So, if you think you can achieve it, even with a little effort, you already know how to choose a house according to your salary. Now you only have to find it.
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