How much house can I afford to buy in Washington State? It’s one of the most frequently asked questions among home buyers today. And we’ve answered it thoroughly below!
Home prices in Washington State have increased significantly over the last couple of years. According to a report from CoreLogic, released earlier this month, Washington State had the second-biggest increase in home prices from August 2016 to August 2017. Home values rose by 10.2%, putting Washington ahead of all other states except Oregon (with a 10.3%) gain. The median home price in the state is currently around $300,000.
As a result of this trend, home buyers today are very much concerned with affordability. In particular, they want to know: How much house can I afford to buy in Washington State? Here’s how to find this answer to this important question.
How Much House Can I Afford in Washington State?
When buyers ask how much they can afford to buy, they’re often asking two questions at once. And they are:
- How much of a monthly mortgage payment can I comfortably afford?
- How much of a home loan can I qualify for, based on my income?
These are two slightly different questions, and we will address them both in detail.
But these are just general “rules” that might not apply to your particular situation. You’ll want to create a specific home-buying budget for yourself. Here’s how to do it.
Creating Your Home Buying Budget
The important question is, how much house can you buy in Washington State without sacrificing your quality of life? You’ll want to determine this number before you even start house hunting. Fortunately, the math is pretty simple.
To begin, compare your net monthly income, or “take-home pay,” to your non-housing monthly expenses. (You only want to include your non-housing expenses at this point, because you’re trying to determine how much you’ll have left over for your housing payments going forward.)
Non-housing expenses include things like…
- Car payment, auto insurance, and gas
- Credit card bills
- Groceries, dining and entertainment
- Savings account contributions, IRA, etc.
Next, subtract these recurring monthly expenses from your take-home pay. The remainder is what you have available to put toward a monthly mortgage payment. Of course, you probably don’t want to use the entire remainder for housing costs. But this does give you a starting point for your monthly home-buying budget.
It’s also wise to keep some emergency funds in the bank for unplanned expenses, income loss, or other financial hardships. Financial experts recommend keeping three to six months of living expenses in the bank, for this very reason. So be sure to factor this in when determining how much house you can afford to buy.
Closing Costs and Down Payments
When buying a home in Washington State, you also have to consider your down payment and closing costs. These are up-front expenses that can affect your buying power.
Your down payment might fall between 3% and 20% of the purchase price, depending on the type of home loan you use and other factors. Military members can often qualify for 100% financing, through the VA loan program. Closing costs in Washington State tend to average between 1% to 3% of the purchase price, though they can be higher than this in some cases.
The point is, there are both up-front and long-term costs to consider when buying a home in Washington State. You must look at both of these factors to determine how much house you can afford.
Mortgage Considerations: Debt-to-Income Ratio
Your debt-to-income ratio will also affect how much of a home you can buy. Mortgage lenders use this ratio to ensure you’re not taking on too much debt, with the addition of the home loan.
The debt-to-income ratio, or DTI, compares a borrower’s debts and income. Example: A person who grosses $4,000 per month, and spends $1,500 on total monthly debts, would have a DTI ratio of 37.5% (because 1500 / 4000 = .375, or 37.5%).
These days, most mortgage lenders prefer borrowers to have a total or “back-end” DTI no higher than 43%. But exceptions are often made for well-qualified borrowers with strong credit histories, significant cash reserves in the bank, etc.
The point is, if your back-end DTI ratio is a lot higher than 43%, you might have a harder time qualifying for a mortgage loan.