THE SCENARIO
When people go to buy a house, they often focus on their maximum price tag. That makes sense; most of the time house shoppers have a pre-approval from a bank which specifies the most money the bank is willing to lend. The amount banks will lend a person depends on a lot of factors, but one of those factors is the size of a person's income. The more income a person makes, the more money they'll be able to devote to a loan payment, and the higher the loan balance can be.
As a
completely notional example, let's say that Sarah makes $78,000 per year, and pays 40% of that in taxes. A bank will loan her money at 4.75%, amortizing over 30 years, so long as the payment on that loan (principal and interest only, excluding taxes and insurance, which are often bundled into a house payment) does not exceed 35% of S...
Read more...
