How To Get Approved For 300k Mortgage – Now that we’re having fun figuring out the minimum income and net worth needed to buy a $5 million home, I thought it would be good to be more inclusive. This post will discuss the income and net worth requirements for buying a home between $200,000 and $50 million.
Income and net worth figures are determined by my 30/30/3 home buying rule and my net worth home buying rule. I truly believe that the combination of these two rules creates the ultimate guide to responsible home buying.
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Check out the chart below, which is based on two of my home buying guides. As you can see from the graph, the higher the house price, the more you have to earn and the higher your net worth should be.
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You can see the minimum income and minimum net worth required to buy a home and the recommended income and recommended net worth required to buy a home.
Now let me share the ideal combination of best to worst before I buy a home. Ideal income and total value requirements will help you shop with more confidence.
Before you buy a house at a certain price you will have an ideal income and an ideal net worth If so, you will have minimal financial worries and will likely enjoy your home to the fullest. Sometimes you may feel that you need to feel it more. But your financial discipline has gotten you to where you are today.
In this case, you will not have much financial worries. Your net worth is very diversified and generates a decent amount of passive income in addition to your active income. You can probably make more active income if you want.
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However, your goal should be to increase your net worth so that your primary residence is below 50% of your net worth. In general, no single asset class should receive more than 50% of your net worth. Primary residence should not exceed 30% of your net worth.
In such a situation, as long as you have confidence in your employment prospects in the next few years, you should do well. In five years, your net worth is likely to grow strongly. Continue to save and invest in stocks, real estate and alternative assets.
Buying a house in this combination is difficult. However, you are optimistic about your future income and net worth growth. As a result, every year you work, you will feel more comfortable in your home.
The ultimate goal is for your primary residence to be 30% or less of your net worth when you retire or move on.
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Buying a home is still not recommended if you cannot earn a minimum income or have a minimum net worth. If you continue to purchase a home with this negligible combination, you’ll be financially exposed to a good night’s sleep. Any business loss or recession can cause you to lose your home to a short sale or foreclosure.
For first-time home buyers, the most feasible financial combination is the lowest income and lowest net worth. But for experienced home buyers, having 1-3 financing combinations above is most advantageous.
If you’re very rich (over $10 million per person), you can break even more rules if you want to buy a nice house. But my guide really recommends keeping your initial home value below 50% of your total value. Ideally, keep it under 30% of your net worth, no matter how wealthy you are.
When you’re very wealthy, you typically spend less than one percent of your net worth on your primary residence. Most extremely wealthy people derive the bulk of their net worth from businesses or investments.
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There are certainly situations where some homebuyers put down a lot more rather than assuming they get a 20% discount. It is estimated that about 15% of all home buyers pay cash.
In a higher participation scenario, the proposed income and net worth requirements may be lower. But how much will drop depends on how much cash and semi-liquid investments you have after buying the house and your future income.
Here is an example. Let’s say you engage in the FANG strategy with 75% participation because you own value stocks. You want to buy a $3 million home, put down $2.25 million, and have a $750,000 mortgage. What should be your minimum income and net worth?
For a disciplined buyer, your income should still be at least 1/5 of the home’s value, or $600,000. Considering you have $2.25 million to invest, you are over your minimum net worth of $900,000 according to my chart. So you’re better off net worth, especially since you’ll have more assets behind you.
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But obviously, if you make such a large down payment, you’ll have much less trouble paying off your mortgage. The truth is that if you only have a $750,000 mortgage after paying $2.25 million, you can probably get away with $150,000 (1/5 of 750,000). But $150,000 will be too small, leaving little to save and invest beyond your capital. Therefore, I do not recommend it.
As a compromise, consider using the recommended income rate, which is 1/3 of the home’s value applied to the mortgage. So a more appropriate income in this situation would be $250,000. You earn $20,833 per month and have a monthly mortgage payment of $3,368 at 3.5%. This would equate to an affordable 16% of monthly gross income.
If you follow this path, make sure you keep your job or at least earn the same amount for the next three years.
Income is the most important factor for buying a home with a mortgage. Without a high enough income, you can not get a loan. In this tough credit environment, your income must be at least 20% of the value of the home you want to buy. Most people with a V2 income and a credit score over 720 should be able to qualify.
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If you’re a freelancer with a more variable income, your income can be much higher than 20% of household expenses. You will need at least two years of minimum income for the lender to proceed. Therefore, you may want to refinance or buy a home before giving up your V2 income.
As you become wealthier, lenders will be more willing to consider your net worth when making a loan. This is called asset-based pricing and it works when your income falls below the 20% home value threshold. For example, some borrowers may post their shares as collateral.
Between higher income and higher net worth, I would choose higher net worth. A higher net worth not only provides more security, but you can better protect it from higher taxes. High income is a means to achieving the goal of high net worth.
We can then choose $12,060,000 for singles and $24,120,000 for couples as the ideal net worth. These are the property tax exemption limits for 2022. In 2023, the estate tax exemption limit doubles to $12,920,000 for singles and $12,920,000 for married couples! With this combination, you pay the least amount of tax and still get to do what you want. If the property tax exemption amount is deducted, you adjust accordingly.
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If you spend on something generous, you can always withdraw the principal if $170,050 or $340,100 income isn’t enough.
I’ve lived in 10,000+ square foot homes before and I’m not sure if I want to live in them with a family of four or five. As an economist, I believe that unused space is wasted. I am happy that all or almost all rooms are regularly used every day. I feel the same way when I load four or five people into my car, only I drive it.
After about 1,500 square meters of space per person, that sounds like a lot. Maybe this feeling is a function of living in expensive New York and San Francisco since graduating college in 1999. But I feel very lucky to live in a house of 750 square feet per person.
Finally, if you have children, they will find another place to live. As a result, you may end up wanting a smaller home as well.
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The number of maintenance issues and potential problems seems to increase exponentially in larger homes. Then there are high property taxes and insurance bills. Personally, I’d be willing to pay a maximum annual property tax threshold of $100,000.