With an annual income of $100,000, you should be able to purchase a house in the $300,000 to $450,000 range. However, your income isn’t the only factor that determines how much house you can afford. Mortgage lenders will also look at your credit score, your debt-to-income-ratio ratio, and the size of your down payment, among other things. You’ll also want to consider how big of a monthly mortgage payment you’re comfortable with making, regardless of what the paperwork says.
If you’re tired of renting and are finally ready to purchase a home of your own, one of the first questions you’ll need to find out is: How much house can I afford? In this example, you’ll specifically want to know: How much house can I afford with a $100k salary?
Well, it depends. Today we’ll talk through how much house you can get with a $100k salary and what other factors come into play in determining how much house you can afford. Keep in mind, your income is just one piece of the puzzle.
How much house can you afford with a $100k salary?
The general rule of thumb says you shouldn’t spend more than 30% of your gross monthly income on housing expenses. That means if you make $100k each year, you have $8,333 in gross monthly income. And, if you follow the rule, that means you shouldn’t spend more than $2,500 on the monthly payment for your mortgage, which includes:
- Property taxes
- Mortgage insurance premiums (private mortgage insurance (PMI) and/or homeowners insurance)
So even if you think you can afford a $400,000 house, which seems reasonable with a $100k salary, you can’t forget to factor in the extra costs of insurance and property taxes that will be added to your monthly mortgage payments.
How lenders decide how much house you can afford
Aside from your income, there are a number of factors that lenders look at when deciding how much house you can afford. Or, more accurately, how much they will lend you to buy a home.
Your credit score is one of the most important parts of your mortgage application. A lender wants to see that you’ve been responsible with your debt obligations to date before granting loan approval.
On average, credit scores of 700 or more should get you into a mortgage. However, depending on the lender and the type of loan — such as a conventional loan, an FHA loan, or a VA loan — the required credit score could be much lower. However, the lower your score, the higher the interest rate you’ll pay which eats into your buying power.
It should be noted that a lower credit score shouldn’t necessarily deter you from buying a house. Particularly if you’re a young, first-time homebuyer, your credit scores might be low simply because you just don’t have much of a credit history yet. However, you still can’t have anything too negative on your report.
“You want to review your credit report for at least three months before wanting to purchase a home,” recommends Jeanne Kelly, founder of The Kelly Group Coaching Inc., and a nationally recognized authority on credit consulting and credit scores.
The more time in advance you have the better. If you find an error, it might take time to correct it. You can also review your credit card balances and if you can lower that debt on your revolving accounts, this can help your score.”
Another piece of the credit picture that lenders will look at is your debt-to-income ratio (DTI). DTI is the amount of monthly debts you have in relation to your gross monthly income. Typically a mortgage lender wants to see a DTI of no more than 43%, meaning you spend 43% of your monthly earnings on debt payments.
But ideally you should strive for less than a 43% DTI. While mortgage lenders may approve borrowers with a relatively high DTI, like other factors, it will have an impact on your mortgage rates. A borrower with a DTI of 20%, for instance, will get a better interest rate than someone with a 42% DTI. As discussed, better interest rates keep your monthly payment lower and saves you money in the long run.
To calculate your DTI, add up your total debt payments, including credit card bills, student loan payments, auto loans, and any other debts you have. Also include as part of your debt payments anything you pay in child support or alimony. Take that number and divide it by your gross monthly income.
For example, if you pay $2,000 a month in debt obligations and make $8,000 a month in income, your DTI would be 25%, which is very good. However, if you only make $4,000 a month, that would make your DTI 50%. This probably means you need to make some changes and work on paying down that debt before applying for a loan.
It goes without saying that you need to have a job to get a home loan, and lenders will scrutinize your employment history as part of assessing your risk factor (including taking a look at your pay stubs). For example, if you’ve had four jobs in the last five years, you’re not going to look quite as reliable as someone who’s been working for the same company for 10 years.
Some lenders may even make it a requirement that you’ve worked at your job for at least two years. That said, they may overlook that if you’ve stayed in the same industry but changed companies recently. Either way, a solid employment history can get you a better interest rate and increase your buying power.
Savings and down payment
In addition to the factors discussed above, you’ll need to know what you have in your bank account when calculating how much house you can afford. Not only do you need enough for a down payment, but you’ll also need some extra to cover closing costs. Closing expenses, on average, come to about 2% to 6% of the home price.
If you can produce a down payment of 20%, you’re in really good shape. While that’s ideally what lenders like to see, they will accept less. A higher down payment can also get you a better interest rate, which can ultimately save you tens of thousands of dollars over the life of the loan.
Lenders typically like prospective homeowners who have at least some money saved up for use towards their down payment — usually between 5-20% of the purchase price. Having a bigger down payment can also help reduce closing costs and lead to better terms overall on one’s mortgage agreement, so it’s generally recommended that home buyers start saving early if they plan on taking out a loan in future years,” says Alex Shekhtman, CEO and founder of LBC Mortgage.
If you can’t swing the 20% down payment, it’s important to be aware that you’ll probably have to pay private mortgage insurance (PMI). And if you’re applying for a conventional loan, this will only increase your mortgage payment.
PMI is insurance meant to protect the lender, not you, cautions the Consumer Financial Protection Bureau (CFPB). “If you fall behind on your payments, PMI will not protect you and you can lose your home through foreclosure.” However, paying PMI may help you to get a mortgage loan that you otherwise might not qualify for.
If you know you won’t have 20% to put down, you might want to look into getting an FHA loan rather than a conventional mortgage loan. FHA loans only require a 3.5% down payment, and may also come with lower interest rates if you have an excellent credit score.
As you’re coming up with your home-buying budget, obviously your desired monthly payment will be a driving factor in regard to how much house you can actually afford. Your pre-approval may say you can afford to borrow $400,000, but your projected monthly expenses may disagree.
For instance, you may have a goal to pay off your student loans in five years. In that case, you don’t want your monthly mortgage payments to be so high that you can’t afford to pay extra on your student loans each month. Similarly, if you are thinking about getting a new car next year, you’ll want to leave some room in your monthly budget to manage that additional payment.
As mentioned earlier, your monthly mortgage payment consists not only of principal and interest payments but also your homeowners insurance and taxes. This means you’ll need to factor these numbers into your home-buying budget.
Home insurance isn’t a luxury — it’s a requirement when you have a mortgage loan. This protects both you and the lender in case of disaster. According to the Insurance Information Institute, the average cost of home insurance is $1,272 per year. However, that can vary greatly based on where you live, your deductible amount, the age of the house, and other details.
To get a better idea of what your homeowners insurance may look like, use the tool below.
The average effective property tax rate in the U.S. as of 2021 was 0.9%, but it could be a lot more than that depending on where you live. This is because tax rates vary by state and county. Your real estate agent can be a great resource for helping you figure out what your property tax payments will be in your desired location and price point.
Suffice it to say, your property taxes will constitute a sizable portion of your monthly mortgage payment. One way to save some money and increase your buying power is to be more flexible about where you live. The next county over (which might only be a few miles away) might have a much better tax rate which could save you hundreds or thousands of dollars a year.
There is a ton of competition in the mortgage loan market and you’ll be surprised to find out how varied lenders can be when it comes to interest rates and loan terms.
Whether you decide to go through traditional banks or credit unions or use an online firm, be sure to get quotes from multiple lenders to find the best deal.
Don’t get more house than you need
You may have dreamed of owning a big house on a lake one day — you may have even found the one you want — but is that more house than you actually need? This is an important question to ask yourself. You don’t want to bite off more than you can chew and suddenly find yourself house poor or fall behind on your monthly payments and risk foreclosure.
The bottom line is that there’s nothing wrong with buying a nice starter home where you don’t exhaust your entire monthly budget. You can always sell your home a few years down the road and buy your dream house. Even better, you could use the starter home as a long-term rental property or as an Airbnb for extra income.
- With a gross income of $100k a year, you should be able to afford a house between $300,000 to $450,000. This depends on the rest of your monthly expenses and your overall financial situation.
- Aside from income, lenders want to see you have a good credit score, a low debt-to-income ratio, and a decent down payment.
- A good to excellent credit score and a large down payment will help you get the best interest rate and loan terms.
- With conventional loans, you’ll typically need a down payment of 20% of the purchase price to avoid paying PMI. This is usually added to your mortgage payment.
- When calculating the monthly mortgage payment you can afford, don’t forget you have to pay property taxes and mortgage insurance premiums as well as principal and interest.
View Article Sources
- Let FHA Loans Help You — U.S. Department of Housing and Urban Development
- What is private mortgage insurance? — Consumer Financial Protection Bureau
- How Much Can You Spend on Your Home? Calculate It Yourself With These 3 Rules of Thumb — SuperMoney
- How Much Mortgage Can I Qualify For? — SuperMoney
- Discover how to get around the 20% mortgage down payment — SuperMoney
- How Much Equity Do I Have in My Home? — SuperMoney
- The Benefits of Buying a House in Your 20s — SuperMoney
- How to Calculate Your Monthly Mortgage Payment — SuperMoney
- How Many Mortgages Can You Have? — SuperMoney
- How to Buy a House – Comprehensive Guide For Beginners — SuperMoney
- First-Time Home Buyers Guide — SuperMoney
- How to Buy a House — SuperMoney
- 2023 Housing Affordability Study — SuperMoney