“How much income will I need to buy a home in the Portland area?” This is one of the most frequently asked questions among Portland home buyers, and a new report by the mortgage information site HSH.com offers some fresh insight.
Among other things, the report showed how much salary home buyers would need to earn in order to afford the principal, interest, taxes and insurance (PITI) payments on a median-priced home. The study looked at 27 metro areas across the U.S., including Portland.
Income Needed to Buy a Median-Priced Home in Portland
According to the report, Portland home buyers need an income of around $70,000 to afford the mortgage payments associated with a median-priced home in the city.
This assumes a house price of $356,700, which is roughly the midpoint for the Portland real estate market. It also assumes a mortgage rate of 3.83%, a monthly payment of $1,647, and a down payment of 20%. Those are a lot of assumptions, particularly the last one. Many home buyers in the Portland area cannot afford a 20% down payment.
So while these numbers might be useful for comparing one metro area to another, they certainly don’t apply to every home-buying scenario. Let’s look at some other ways to figure out how much income you might need to buy a house in Portland.
As the name suggests, a debt-to-income (DTI) ratio is a comparison between a person’s debts and income. Example: A person with a gross monthly income of $4,000 and total monthly debts of $1,500 would have a DTI ratio of 37.5% (1500 / 4000 = .375, or 37.5%). This is known as the total or “back-end” debt-to-income ratio, because it includes all monthly debts: mortgage payment, credit cards, auto loan, etc.
Generally speaking, mortgage lenders prefer to see a back-end DTI ratio no higher than 43%. But this number is not written in stone. Exceptions are often made for well-qualified borrowers with strong credit histories. The point is, if your back-end DTI ratio is much higher than 43%, you might have a harder time qualifying for a mortgage loan.
So the income needed to buy a home in Portland will partly depend on: (A) the amount of recurring debts you have, and (B) the amount you’re trying to borrow. The debt-to-income ratio takes both of these factors into account.
Getting Pre-Approved by a Mortgage Company
All of the examples above are general in nature. As a Portland home buyer, you need to know how much you can borrow based on your specific financial situation. That’s where mortgage pre-approval comes into the picture.
During the pre-approval process, the mortgage lender will examine your current income, assets and debts to determine how much they’re willing to lend you. Most home buyers get pre-approved before shopping for a home, and with good reason. Sellers will take you more seriously if you have a pre-approval letter from a lender. It also helps you narrow down your home search to the properties you can afford to buy.
How Much Can You Comfortably Afford?
Before talking to lenders or submitting loan applications, you should have a general home-buying budget in mind. You’ll want to determine how much of a monthly mortgage payment you can comfortably afford.
In this context, “comfortably” means that you can can cover you mortgage payments and all other recurring expenses, while still having some money left over each month for lifestyle, entertainment, retirement savings, etc.
This is where budgeting comes into the picture. Many financial advisors recommend spending no more than 33% of monthly income on mortgage payments, but this is just a general rule. Most importantly, be sure to keep an emergency fund in the bank, for unexpected outlays like car repairs, medical bills, etc.
Have questions? If you have questions about the income needed to buy a home in Portland, or other mortgage-related concerns, please contact a member of our staff. You can also start the process online with our web-based application.