How much house do I qualify for?

One of the most frequent questions we get is, “How much house can I  buy with my income?” Recently, a reader asked us that question. He mentioned that he and his new wife earn $110,000 annually. He wanted to know first whether it was possible to buy a house in the Bay Area. Here’s what I told him:

Yes indeed. How much home you can buy depends on three things:

  • Your down payment
  • Your credit score
  • Your other debt payments.

Debt-to-Income Ratio

Lenders make lending decisions based on “debt to income ratio,” or DTI. We calculate it by adding up the total house payment including taxes, insurance and mortgage insurance, if any, plus any monthly debt obligations with ten months or more remaining. This would include car payments, student loans, credit card minimums and alimony/child support. The sum is called “total debt.” That number, divided by your gross monthly income, produces the DTI. Lenders will allow a DTI as high as 50% for conventional loans.

Down Payment

Your down payment will obviously affect your payment because of the size of the loan. If your down payment is less than 20%, lenders will require mortgage insurance. This limits their risk in the event a borrower defaults and the property is sold at foreclosure auction. The mortgage insurance, the cost of which is determined by a combination of loan-to-value ratio and credit score, is part of your housing expense in calculating DTI.

Credit Score

Your credit score will determine the rate you get. Lenders selling their loans to Fannie Mae or Freddie Mac use “risk-based pricing.” This means that they consult a table containing credit scores on one side, and loan-to-value across the top. Where a borrower’s two numbers interest, the lender will determine how much to adjust the interest rate.

The minimum required score for a conventional loan is 620. A borrower with that score can still get approved for a loan, but their rate will be approximately .75% higher than for a borrower with a 740+ score. The same holds for the cost of mortgage insurance. A borrower with a 740 score and a 90% loan will pay .41% for monthly mortgage insurance. A borrower with a 620 score will pay 1.10% for the same kind of loan.

Your other debt service will also determine how much you qualify for because the lender (actually, Fannie and Freddie, one of whom will almost certainly buy the loan) will limit your total obligations to 50% of your gross monthly income.

Some examples

Now that all the theory is out of the way, here are some examples, all based on a 50% DTI:

  1. You have 20% cash to use as a down payment, plus a bit more for closing costs. Your credit score is 740 and you owe $500 in other debt payments. You can expect a rate of about 4.875% and will qualify for a purchase of about $740,000. Your monthly payment will be $4,000 including taxes and insurance
  2. You have 10% cash available to put down. Other variables are the same. You’ll qualify for $640,000 with a total monthly payment of..surprise—$4,000. The reason for the difference in price is the larger loan amount and $200 a month in mortgage insurance
  3. You have 5% cash to put down. Now your loan is larger and the cost of mortgage insurance is higher, so your maximum is going to be $600,000.

Can you buy in the Bay Area?

There are those who have said “fugeddaboudit” about buying a home in the Bay Area. While prices in Silicon Valley have gotten, well…stratospheric the last couple of years, there are plenty of other decent areas where prices are within your reach. In Contra Costa County, nearly half the active inventory is priced below $600,000. For Alameda County, it’s about 1/3.

The Secret Sauce: Tax Credits!

There is one other thing that can help you, if you’re a first-time buyer. You qualify for that status if you have not owned your principal residence for at least three years. As a first-time buyer earning less than $125,000 (or $146,000 if your houshold is 3 or more), you qualify for Mortgage Credit Certificates (MCC). This is a little-known program that will allow you to claim 20% of the mortgage interest you pay as a tax credit—it comes off the bottom line of your taxes. Because the credit is a specific amount, we treat it as income, which will further increase the amount a buyer can qualify for. You likely qualify for a higher purchase price than the MCC maximum, but if you stay within the maximum, which is $585,700 for most of the Bay Area counties, it will save you thousands annually. You get the credit every year that you own the property and occupy it as your primary residence. You can get more information in our MCC video. Have a look!


A change to report!

Tax Reform and You

By now, you have already seen dozens of articles about the recently-passed “Tax Reform and Jobs Act.” While it has not yet been signed into law, there is a great deal of speculation about the final bill. Specifically, people wonder about how the changes will affect the ownership of real estate.

Every situation is different, and you can’t rely on the on-line calculators that claim to show you how much you’ll save under the tax plan. Taxation is necessarily complex, but this article should give you some guidance about how to arrive at your own conclusions—based on the actual bill, not on some pundit or politician’s speculation about it.

The up-front disclaimer

Your humble author is not a CPA, tax preparer or tax lawyer. While I make every possible effort to be sure what I say is correct, you should not consider any of this to be authoritative tax advice. Rely on your regular tax person for that. If you (or your tax person) find any errors in this article, feel free to reach out to me directly.

Income tax is quite a bit more complex than it may appear from this article; but even though I am intentionally over-simplifying it a bit, you should come away from reading this with a good understanding of how income taxes work—and, more importantly, you should be in a better position to determine what, if any, benefit there is for you in the new tax law. Be patient as we work through the basics.

How taxes work

In order to understand what benefits you may receive from the new tax bill, you should know how our progressive tax system works. “Progressive” means that each portion of your income is taxed at a progressively higher rate. I’ll use a filing status of “married filing jointly” throughout, for simplicity.

The tax on the first $19,050 of income is taxed at 10%. From $19,051 to $77,400, it’s taxed at 15%, and so on. The percentage is called the “marginal tax rate.” It is not your overall tax rate—the percentage of your income that you actually pay.

The table is arranged to simplify your calculation. Here is an example:

Your taxable income is $100,000. That means you are in the 25% bracket—you are above $77,401 but below $156,151. You’ll pay base tax of $10,658 plus 25% of the income above $77,400. That’s $22,600. 25% of that amount is $5,650. Your total tax is $16,308, which is an overall rate of 16.3%.

Deductions, exemptions and credits

You are allowed to reduce your gross income by certain deductions and exemptions to minimize the income tax you owe. Here is where they come into play.

An “exemption” is what used to be called a “dependent.” Each exemption is worth $4,150 (2018 schedule before the tax bill). For a married couple, you’ll get two exemptions, for $8,300, plus one for each dependent child.

“Deductions” are other items you will use to lower your taxable income. If you own a home, you may choose to deduct the mortgage interest you paid, along with property taxes and state income taxes. There is also a “standard deduction” you will use if it’s more than the total of the things you can itemize. It’s $13,000 for a married couple filing their return jointly.

Subtracting exemptions and deductions from your Adjusted Gross Income (AGI) give you taxable income—the number used to calculate how much income tax you owe.

Finally, you may receive tax credits. These reduce your tax liability on a dollar-for-dollar basis. One popular tax credit is the child credit, where families are able to deduct $1,000 for each child in the household 17 years of age or younger. Another is the Mortgage Credit Certificate (MCC), which allows a qualifying first-time buyer to claim a percentage of their mortgage interest (currently 20% in California) as a tax credit.

One simple scenario: A married couple with one child, filing jointly. They earn $100,000 annually and do not have enough deductions to itemize, so they’ll use the standard deduction. Their income tax numbers will look like this:

One more scenario before we look at the changes. Our young family just bought a home, so they have some interest and property tax to deduct. Let’s say they also paid $2,000 in state income taxes. If the total of these items is more than $13,000, they’ll itemize their deductions on Schedule A of their tax return.

They bought their home last year for $530,000. It’s their second home, so they were able to put 20% down. They paid $18,000 mortgage interest and $6,500 property tax. They’ll itemize these, along with the $2,000 state income tax. Their situation will look like this:

Because they own a home and have enough individual deductions to justify itemizing, they reduce the taxes they owe by $2,025, or about $170 per month. This is the tax advantage of owning their home: the difference between what they would pay as a renter (standard deduction) and what they’ll pay as a homeowner (itemized deductions).


On January 1, 2018, the new tax code will presumably take effect. While it is a massive bill (1,097 pages), written by a bunch of lawyers, here are the main changes as they will affect you. We’ll also list some items that will not change even though either the House or Senate version may have originally made a change. These items are from the text of the Tax Reform and Jobs Act itself.

Old System

New System

Mortgage interest

You can deduct interest on the first $1 million of loan.

You can deduct interest on the first $750,000 of loan
Equity lines

You can deduct interest on up to $100,000 of loan placed on the property after its purchase, such as a HELOC

You can no longer deduct interest on a HELOC
Property and state income tax

You can deduct the amount of property tax and state income tax you paid

You can deduct up to $10,000 for the total of property tax and state income tax
Capital gains on selling your home

You can exclude up to $500,000 in gain ($250,000 for a single person) as long as you have occupied the home for 2 out of the previous 5 years

No change. There was a proposal to change the requirement to 5 of the previous 8 years, but it was removed from the final bill
Mortgage Credit Certificates (MCC)

These allow first-time buyers of low and moderate income to claim a tax credit for 20% of the interest they pay for as long as they occupy the home as their personal residence

No change. The House version eliminated MCC, but that provision was removed in the final bill

Non-Real Estate Provisions

Personal exemption

$4,150 per person

Repealed—no more personal exemption at all
Standard Deduction

$13,000 (married filing jointly)

$6,500 (single)

$24,000 (married filing jointly)

$12,000 (single)


Deductible, but recipient claims it as income

No longer deductible. Recipient no longer claims it as income.
Estate Tax

Tax applied to estates valued above $5.49 million ($11 million for married decedents)

Exclusion raised to $11.2 million for single decedent
Pass-through Income (corporations and LLCs)

No provision for any adjustments

20% reduction of pass-through income claimed, but with some limitations and conditions. Essentially, someone who owns a corporation whose income is reported on their personal tax return, that income will be treated at a lower rate than ordinary income. High earners, such as high-producing real estate agents and other professionals, will save a great deal of money with this provision
ACA insurance mandate

Those who do not have health insurance will pay a fine, which was deemed by the Supreme Court to be a form of tax

The ACA mandate is repealed effective 2019
Tax brackets

Seven brackets, ranging from 10%-39.6%.

A taxpayer reaches the top bracket with taxable income of $480,051

Seven brackets, ranging from 10% to 37%.

A taxpayer reaches the top 37% bracket with $600,000 taxable income. Someone earning $480,051 would see their tax bracket drop to 35% compared to the existing law

For those seeking a more detailed summary, visit “Tax Buzz” or the National Association of Realtors summary. This page is focused on how the law affects homeowners and real estate agents.

How the changes affect you:

The three-person household we have used for our example would see their taxes change like this:


If they don’t itemize their deductions, they’ll see their taxes go down because of the lower marginal tax bracket and the doubled child credit. The credit is temporary: it expires in 2025.

If the family can itemize their deductions the picture looks like this:


The total deductions the family can itemize under the new system amount to $2,500 more than the standard deduction. We have listed that as “additional” on the grid. They will reduce their tax liability by $766, compared to the $2,491 they would save if they were unable to itemize their deductions.

Where to go from here

If you want to examine different scenarios for yourself, do this:

  1. Print out the old and new tax tables from this page
  2. Write down your gross income for “old” and “new” scenarios
  3. Calculate your “old” taxes using either itemized deductions or the standard deduction as appropriate
  4. Calculate the “new” taxes in the same way
  5. Compare

If you are handy with a spreadsheet, you’ll save a great deal of time, at least with the simple math part.

I’ll reiterate: I am not a CPA, tax preparer or tax attorney. I do my best to be accurate, but you should not consider any of what you have just read to be tax advice. You should get that from a licensed professional, not Some Guy on the Internet (me).

You are welcome to reach out to me, however. My direct line is 925-383-2846. If I am unable to pick up, please leave a message.

Joe Parsons




“Brexit”–and what it means to mortgage rates today

brexit graphicYou have probably heard about the important vote in the United Kingdom: Britain will leave the European Union. What you may not know is the effect an event in Europe could have on you here in California.

How “Brexit” affects you

The results of Thursday’s election in the UK has roiled financial markets all over the globe. The U.S. stock market reacted with heavy selling: the Dow Jones Industrial Average was down more than 500 points at times. This volatility causes “flight-to-safety” buying—investors sell stocks, but move their cash into safer investments, such as U.S. Treasury bonds, which are viewed as having nearly zero risk.

They also pour money into Mortgage Backed Securities, which are also very safe, but with a much higher yield than Treasuries.

All this buying of bonds means that their prices are moving higher. This is welcome news for anyone in search of a new mortgage to buy or refinance a home in the San Francisco Bay Area.

Mortgage lenders sell most of their loans to investors. Fannie Mae and Freddie Mac top the list of these investors. These two mortgage giants pool the loans they have bought into a type of bond called Mortgage Backed Securities (MBS). When the demand for MBS is higher, their price increases. This higher price means that the lenders can sell their loans for a higher price, so they lower the interest rates on the mortgages they offer.

The news of Britain’s exit from the European Union (“Brexit”) has sparked furious activity in the financial markets worldwide. This morning’s chart for the MBS looks like this:

MBS Chart

The mortgage market at the open on Friday 6/23/16

Each green bar means that the price of the MBS increased from the day before. A long bar means a large change in price. The MBS market normally moves 10-25 points from one day to the next. Today, however, the market opened with a 75-point gain from yesterday’s close. This is an unusually large increase.

What this means for you

Lenders look at the MBS market each day as they prepare their rate sheets. Because of today’s sharp gain, rates are lower—nearly .25% lower than yesterday’s pricing.

What you should do now

If you are thinking about buying soon anywhere in the San Francisco Bay Area, now is a good time to act; today’s lower rates mean a lower payment for the home you want—or more home for the payment you can afford. If you are considering a refinance, you should lock a rate as soon as possible; your potential savings are higher today than ever before. Keep in mind that it is highly unlikely that rates will move any lower than they are today—but very likely that they will “bounce” higher in the very near future.

Be careful!

Any time the market makes big moves like this one, there is increased volatility—prices make wide swings in both directions. Holding out for further improvement could lead to disaster: you could miss the boat entirely.

We are here to help you take advantage of this opportunity. You can call us anytime at 925-383-2846.