Now that interest rates are below 4% for a 30 year fixed mortgage, my phone seems to be ringing off the hook with people who want to see how much mortgage they can qualify for and how much house they can buy. (I know it's a recession, but in Los Angeles alot of people still have work). Always being a fan of brevity, I came up with this ultra simple mortgage qualification tool. It is only two steps:
1. Determine your household gross income if salaried or adjusted gross income if self-employed/business owner. (Line 37 on tax returns)
2. Divide this number by 0.2
The result is about how much mortgage you could qualify for at 4% interest. Now this is different (lower) than how much house you can afford because you will need to combine this mortgage money with a down payment-either 20% for conventional loans or as little as 3.5% for FHA.
Let's do an example: Joe and Jane Homelookers want to buy a house in Eagle Rock. Joe earns $95,000 salary at the widget factory and Jane has a cookie baking company with net income of $35,000 per year. Their combined household income is $130,000. Can they afford that gorgeous craftsman bungalow for $600,000?
130000\0.2 = $650,000. They can afford it. Let's write the offer up.