How to buy a more expensive home with no additional income
It might seem impossible but there are plenty of ways to buy a more expensive home without increasing your income. One of the ways that isn't talked about as much is instead of using all of your savings on the downpayment, you can be strategic and use some of it to pay off debt which will often disproportionally increase the amount of home your can afford relative to the dollars you spent paying off your debt. Check out a few of the strategies in this video.
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Do you want to be able to afford a more expensive home with no additional income? Well, then today's episode is for you. So let's go ahead and get into it.
Okay, so you've been thinking about purchasing a home for a while now you finally have enough saved up that you feel like you're ready to go out and make that home purchase. So the next thing you do is you go out and you talk to a lender to get your pre approval, and they're going to give you an amount that you're able to spend every single month on your mortgage. But where did they get that dollar amount? Well, it's going to come from two major things, one is going to be your credit score, the second is going to be something called debt to income ratio. Today, we're going to be focusing on that debt to income ratio, and how you can leverage that to be able to afford a more expensive home without having to have any additional income.
So what is debt to income? Well, the easiest way to describe it is all the money coming in, versus the money going out. Now, when I say money going out, I'm not talking about your cell phone bills, utility bills, grocery bills, the things that the lender is going to be focused on is going to be car loans, personal loans, their minimum credit card payments, and even things like child support. That's the things they consider debt. So they're gonna again, take all that money you have coming in every month, compare that to the money going out. And typically, on most loans, you need a debt to income ratio of about 45% or less, which means that including your mortgage, you can't have more than 45% of your money that is coming in every month going out to these types of debts.
So now let's go over a quick example of why these debt to income ratios are so important, and how you can now utilize this information to be able to afford a more expensive home. Now to make it easy. Let's go ahead and say that either you or you and your spouse are coming in with $10,000 of income every single month. Now when you go back to that 45% debt to income ratio that I was talking about, or DTI, that means including your mortgage, you can't spend more than $4,500 a month on your monthly debts.
Now let's go ahead and assume that you also have a car payment. So let's say your car payment is $700 a month. Now looking at that car payment, that effectively reduces the amount of mortgage you get from $4,500, down to $3,800. And just that drop alone is going to be almost $100,000 in a price difference between what type of home you can afford. So you can see that these small differences in the amount of debt that you're putting out every single month can have a huge impact on the type of home you can afford.
Now this is where things get interesting. And you can see why knowing this information can really benefit you when you're trying to maximize the amount of home you can afford. So let's go ahead and say on that car loan, you still owe $15,000. And you have a downpayment of let's say $50,000 to put on your new home, well, instead of putting that full $50,000 towards that downpayment. Instead, if you were to pay off your car loan, and put $35,000 down as your down payment, that's going to significantly increase the amount of home you can afford. Because if you use the entire amount for your down payment, it's really only increasing your purchasing power by that $15,000. But if you pay off that car loan, and now free up $700 of debt every single month, that means that you're going to be able to afford a home that's $100,000 more with today's current mortgage rates.
So you can see there's definitely a strategy involved in terms of your debt to income ratio, when it comes to how much home you can afford. So another question I get about this often is maybe someone has a car payment, as well as some credit card bills. And they're wondering which one should they pay off to be able to maximize how much home they can afford? Well, again, it's all going to come down to how much that monthly debt to income ratio is impacted. Now, with credit cards, when the lender looks at it, they're only looking at the minimum credit card payment. So oftentimes, it's still going to be more beneficial for you in terms of how much home you can afford to pay off that car loan versus paying off credit card bills. Now I know credit card interest rates are much higher than car loans. So you do have to take that into account in terms of how much interest you're going to be paying every single month, depending on what you're paying off.
But in terms of purely how much home you can afford, you really just want to figure out what is going to be the biggest impact on your debt every single month, and try to take care of that if you have extra money to be able to put towards that versus putting it towards your down payment. Now finally, I want to address the elephant in the room. Let's go ahead and say now that you don't have a giant downpayment saved up to be able to purchase a home and you're just not going to be able to pay off a giant car loan or pay off all your credit card debt. What are you supposed to do to be able to help increase the amount of home you can purchase? Well, this is where it's going to come down to decision time. If that car you're driving is costing you 678 $100,000 a month to drive that luxury car.
Maybe it might be time to think about downsizing to something a little bit smaller, more practical, where you're only having to spend $300 to $400 a month on that payment, and now you just freed up a couple $100 a month that you can now spend on a mortgage instead. So again, everybody's situation is different. But these are the questions you should be asking a lender when you talk to them to figure out what you can do to help you afford the most amount of home without having to increase your income by anything.
