2. IN ADDITION TO GOOD CREDIT, A PERSON LOOKING TO BUY A HOME ALSO MUST SHOW SUFFICIENT INCOME TO SUPPORT THE MONTHLY PAYMENT. Pillar 2: Income Ratios

3. What Is Sufficient Income? A suggested income distribution:

4. PITI – What Is It Your monthly housing payment is broken down into three elements: 1. Principal & Interest – the monthly payment on the bank loan (or mortgage). 2. Taxes – Home owners must pay real estate taxes to their local government for schools, police, etc. 3. Insurance – If you borrow money to buy a house, the bank forces you to insure it.

5. Principal & Interest To determine the monthly payment on a loan, we need to know the original loan amount (Principal), the annual interest rate, and the repayment period. Most mortgages are 15 or 30 year loans. Example: $200,000 @ 6% for 30 Years = $1,199.10 per month for the next 360 months. Use a mortgage calculator to help you. Simply search “Loan Calculator” and many come up. I like Bankrate.com. That link is posted in this section.

6. Taxes Real Estate Taxes are determined by the town you live in. Generally they are expressed as a percentage of your home’s value. For example, the City of Burlington taxes homes at 2.1464% of your home’s value. A $250,000 house has an annual tax bill of $5,366, or approximately $450 per month. Real Estate Taxes are typically due every 4 or 6 months, but your mortgage lender will require you to save for them monthly.

7. Insurance If a bank is going to lend you $200,000 for a house, they want to know that if it burns to the ground, they will get their money back. So, they require insurance. Average homeowner rates are generally between $700-$1,500 annually. Or $60-$125 a month. What determines your rate? Lots of things, including: Age of Home – Is your roof, plumbing, electrical system modern? How close is the fire department and is there a hydrant close? Do you live in an area prone to natural disaster? Is your area a high crime area? Is their a pool, trampoline or other play equipment that may result in catastrophic injuries or death? Even if you do not have a mortgage, you should always have insurance…it’s a small price to pay to avoid a major future expense. Accidents happen!!

8. PITI – How Much Can You Afford? As a general rule, banks like to see people spending 30% or less of their monthly income on PITI. An example: $250,000 house with a $200,000 mortgage at 6% for 30 years in Burlington, VT: $1,199 (P&I) + $450 (T) + $100 (I) = $1,749 / Month You would need to make about $70,000 a year to afford this.

9. A Few Other Thoughts on PITI If you have a lot of other loans (cars, credit cards, etc.) that are costing you a lot, the bank will limit what they lend you. As a general rule, they want PITI + Other Loans <= 40% of monthly income. Taxes are not based on the price you paid for your home, they are “assessed” by the town. This assessed value is often lower than the purchase price.  Towns love to “reassess” when they need more revenues! The tax rate does not change, but the annual bill does.