An article (hat tip to Julie Hall) caught my eye in my Facebook stream regarding how much income a household needs in order to be able to buy a home in various metropolitan cities. According to New York Smash, if you’re going to buy a home in Seattle, you’re going to need an annual income of at least $63,145.41. There’s more to just how much income one makes when it comes to determining “how much” home someone can qualify for. The article does not mention how much down payment a person will need. Let’s run some figures to see just how much income one needs to buy a home in Seattle.
Trulia reports that the median sales price in Seattle is currently around $415,000 (click image for large picture).
Let’s start with determining how much down payment a household with an income of $63,000 would need to buy a home priced at $415,000 in Seattle.
Ready for some math? 🙂 This part is simple.
Lenders look at the monthly gross income to determine debt to income ratios.
63,000 divided by 12 months = a monthly gross income of $5,250.
Let’s assume a maximum “back end” debt to income ratio of 45%. The “back end’ ratio is factoring the proposed new total mortgage payment (including taxes, insurance, principal and interest, any mortgage insurance and any home owners association dues) plus the monthly debt payments divided by the gross monthly income.
If we take 45% of the gross monthly income of $5,250, we have $2,362.50. $2,362.50 can be used for paying the entire mortgage payment and all debts while still qualifying for a mortgage.
This part is kind of tricky. We don’t know how much monthly debts our Seattle home buyers have. Maybe they pay off their debts each month or maybe they have a car payment, student loans and/or credit cards. Let’s assume they have $362.50 each month in debts. That means we have roughly $2,000 per month that can be used for a mortgage payment.
If our Seattle home buyers are purchasing a home priced at $415,000, we need to factor how much the property taxes and home owners insurance will be and deduct that from the proposed mortgage payment so we can determine how much the principal and interest will be. Typically when estimating property taxes for a rate quote, I use 1.25% of the sales price divided by 12 months. However, in Seattle, property taxes tend to be lower than other parts of King County. For this example, I’m going to use 1% of the sales price and assume the annual property taxes are $4,150 and estimate $600 per month for home owners insurance. This means the monthly property taxes will be $345.83 and insurance estimated at $50 per month.
$2000 total mortgage payment minus property taxes of $345.83 and home owners insurance of $50 per month equals $1,604.17 for principal and interest (and any possible mortgage insurance or home owners association dues).
Markets are closed as I write this post while waiting for the Seahawks game (Sunday, November 17, 2013), so rates quoted below are based on what was available Friday, November 15, 2013. For a current rate quote based on your personal mortgage scenario for a home in Washington state, please click here.
For a 30 year fixed conventional mortgage with credit scores of 740 or higher with 20% down payment, effective 11/15/13, rates were 4.250% priced with 0.654 discount points (apr 4.388%) closing by December 24, 2013 or sooner.
Assuming 20% down payment, the principal and interest works out to be $1633.25 with a total payment of $2,029.27.
Based on a total mortgage payment of $2,029.27, we have debt to income ratios of 38.649/45.554. With a 20% down payment and credit scores of 740 or higher, we would approve this scenario all day long.
So if you are buying a home in Seattle (or anywhere in Washington) and you have a gross annual income of $63,000 and you want to buy a home priced at $415,000, you will need a down payment of 20% ($83,000) plus closing cost and prepaids, assuming you’re using a 30 year fixed conventional mortgage.
This is just one possible option. We have many mortgage programs available for homes located in Washington state, if you would like me to help you with your next mortgage, click here.
…stay tuned… I’ll be sharing more examples on how much a Seattle home buyer can qualify for based on scenarios around this data.