RealAnswers

One reader wanted to know the “average” loan amount for a household with good credit and an income of $50,000. This is a great example as $50,000 is pretty close to the national median household income of $48,201 in 2006. If your household income is lower or higher than $50,000, just multiply all the “answers” by the percent of $50,000 that is your household income. One other note, before we start. If only one party in the household has good credit, a loan is still possible, but you’ll need to base all the figures on the income of the person with good credit alone.

So, what’s the average loan amount? I don’t know of any good source for that statistic. But fortunately I have some more useful information, the answer to this question: “How much can a household with good credit and $50,000 income borrow?” That answer varies a little depending on the type of loan. It also varies literally day-by-day as interest rates change.

For conventional, conforming loans, there are two relevant “debt ratios” – 28% of gross income for housing and 36% of gross income for total debt. Gross income is your total pay before any taxes are withheld. This means that the allowed house payment, including taxes and insurance, for a $50,000 income, good credit borrower is $1166.67/month. But that’s not the full picture. Total debt payments, including the house payment plus credit cards, car payment and any other consumer debt that shows up on the credit report, are limited to 36% of gross income. For a borrower with $50,000 income this total is $1,500. So, if the borrower has a $350 car payment and $150 in credit card payments, that leaves $1,000 available for the house payment. In other words, the total debt ratio can leave the borrower with less than 28% for the house payment, but generally speaking it’s not possible to exceed that 28%.

Let’s assume that our $50,000 borrower has little other debt and can spend the full 28%. Let’s set aside a reasonable amount for taxes and insurance, $2,000/year or just under $167/month. This leaves $1,000 a month for the principal and interest payment – the actual loan payment. For a 30-year Fixed Rate Mortgage today’s rate (Oct. 19, 2007) according to the Freddie Mac Primary Mortgage Market Survey is 6.4%. This allows a loan amount of $159,870.59. For a 15-year mortgage, current rate is 6.08%. This allows a loan amount of $117,898.80. With a 1-year Adjustable Rate Mortgage with a 30-year amortization, you could borrow $163,793.83 – but that rate could adjust upward and the payment would also increase. (Thanks to Bret Whissel for the amortization calculator I used to figure these loan amounts. When rates change, you can use his calculator to find the answers for the new rates.)

With an FHA loan, the borrower can get a slightly larger housing debt ratio of 29% and a bigger total debt ratio of 41%. The 1% difference in the housing payment isn’t a big difference, but the extra 5% on total debt could mean an extra $200 for our $50,000 borrower each month for car payments, credit cards, etc.

The reader was interested in average amounts and I suspect was as interested in knowing what’s advisable as what’s average or allowed. Those are the allowable amounts. Does that mean they are advisable amounts? Not necessarily. A lot will depend on your current situation. If you’re paying high rent, those amounts could represent a drop in your monthly bills. If you’re in one of the, increasingly common, areas where house prices have run up faster than rents, buying may mean substantially raising your monthly payments. Of course, there is a savings component to paying off a mortgage, so if you currently have a good savings plan, you may still be in good shape saving a little less and paying a little higher mortgage than your current rent. The main point to consider is that all those decisions are yours to make in the context of a your own budget and your own financial goals. The banks and mortgage companies are not concerned with whether you have extra money to buy pizza on Friday nights. They are perfectly content with your eating a bowl of beans and rice as long as you can, in theory, meet the house payment.

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