Before you begin searching for your dream home, it’s a good idea to identify how much you can afford. If you intend to buy a home on a $100,000 salary, there are some challenges and considerations that you must account for.
With a six-figure salary, your earnings are likely high enough to purchase a great home. However, there are other factors that determine your ability to afford a house that falls in the $300,000 to $500,000 range, which include everything from your down payment to your credit score.
While a $100,000 salary might appear to be more than enough to afford a home that costs $400,000, a recent survey by PYMNTS/LendingClub found that nearly 50% of people who earn at least $100,000 state that they are living paycheck-to-paycheck.
Even though a salary of $100,000 is well above the national median household income of $80,610, it doesn’t fully account for the high cost of living as well as mortgage rates that remain elevated. While you may encounter some challenges when attempting to buy a home on a $100,000 salary, you can overcome them with the right strategy. In the following guide, you’ll learn “How much house can I afford with 100K salary?”
Start with the 28/36 Rule
Begin with the 28/36 rule as a baseline for the budget you’re creating. This guideline indicates that you shouldn’t spend over 28% of your total income on housing expenses. Your total debt payments shouldn’t exceed 36%. In this scenario, any debts you pay aside from your housing expenses can’t be higher than 8%.
The monthly gross income that you earn with a $100,000 salary is $8,333, which means that your mortgage payment shouldn’t be higher than $2,333. The remainder of your debts should amount to $667 or less. These debts include credit cards, student loans, and car payments. If you adhere to this rule, the 36% in the equation will be around $3,000.
Keep in mind, however, that there are other variables to consider when creating a well-rounded budget. For example, how much savings have you built up over the years? Make sure you calculate the costs associated with property taxes and homeowners insurance.
How Can I Afford a $400,000 or $500,000 House?
Let’s say that your dream home comes with a $400,000 price tag. We’ll also assume that you’re applying for a 30-year fixed mortgage that comes with an interest rate of around 6.5%. If you make a 20% down payment, your monthly mortgage payment will be around $2.022.
In this situation, your mortgage payment is around $211 below the 28% goal that you’ve set. You should be able to afford a $400,000 home if all these factors are true. However, buying a $500,000 home is more challenging. The same loan terms would result in a monthly payment of $2,528, which is nearly $200 above the limit. You may be able to afford a more expensive home if interest rates drop.
How to Determine How Much Home You Can Afford
There are several factors that determine how much of a home you can afford, which include everything from your credit score to your debt-to-income ratio. Your annual income is also a crucial element in assessing your financial profile to ensure you’re eligible for a mortgage loan. Lenders will evaluate annual income levels to make sure you can afford the monthly payments that come with the loan.
Your credit score represents a significant factor in determining your eligibility for a loan. It also influences your interest rates. If your credit score is low, you’ll likely receive a high interest rate, which helps minimize the risk that the lender is taking on. A higher credit score should help you qualify for a low interest rate.
- Excellent Score (740 or above): With a score above 740, you’ll likely receive highly favorable terms from your lender. Borrowers with credit scores above 740 usually get the best interest rates, which means that you can potentially save thousands of dollars if you have a high score. Since a low interest rate leads to lower monthly payments, you could afford a higher-priced home.
- Good Score (700-739): While this isn’t a perfect score, it’s good enough that most lenders will provide you with competitive rates. You should also be able to afford homes in the $400,000 range with this score.
- Fair Score (650-699): A score in this range means that your interest rate will likely be above the national average, which can make it more difficult for you to afford your dream home. However, you can still purchase a home. Consider taking steps to increase your credit score before you make an offer on a home.
- Poor Score (Anything below 650): With a score below 650, you may find it challenging to qualify for a mortgage loan. Along with a higher interest rate, you’ll also have fewer loan options at your disposal. Some lenders may disqualify you entirely. If you find yourself in this situation, it’s a good idea to focus on credit repair to gain access to better opportunities.
Your down payment can also impact your ability to receive favorable loan terms. It also changes affordability. Let’s take a look at a few scenarios you might encounter depending on the down payment percentage you make.
If you make a 20% down payment, you won’t need to purchase private mortgage insurance (PMI). You’ll also qualify for some of the best interest rates. Since 20% of the home will already be paid off, you’ll benefit from lower monthly payments. You’ll also be able to apply for a larger loan amount.
A 10% down payment allows you to qualify for good interest rates without needing to pay high upfront costs. However, you’ll be tasked with obtaining private mortgage insurance. If you’re applying for an FHA loan, your down payment can be as low as 3.5%. While this is an appealing option for many buyers, the interest rate and monthly payments will be considerably higher.
When considering interest rates, the average is currently hovering between 6.5% to 7.5%. However, the recent rate cut by the Fed should eventually lead to lower rates across the board. A single percentage change in your interest rate can make a big difference in your monthly payments. With the terms mentioned previously, your monthly payment will be $2,023 with a 6.5% interest rate. If your interest rate is 7.5%, you’ll pay $2,237 per month.
Consider your debt-to-income ratio (DTI) as well. This ratio tells your lender how much of your monthly income is attached to debt payments. By making this calculation, they can identify how much money you’ll have to pay for a mortgage. A low DTI gives you more room to make a house payment. Most lenders want borrowers to have a DTI that’s around 43% or lower. If you have excellent credit and a great financial profile, you may qualify for a loan with a DTI that’s as high as 50%.
Your Savings
Savings can also play a significant role in home buying. Keep in mind that placing your money into a savings account with a high yield can help you increase your savings over time. Having access to more savings means that you can make a larger down payment and receive a better interest rate.
It may also be able to reduce your loan-to-value ratio. While it’s not necessary to make a 20% down payment when buying a home, it will allow you to avoid paying for private mortgage insurance. The insurance policy comes with monthly premiums that invariably increase your payments.
Your Location and Must-Haves
The location you move to can also impact the affordability of a home. If you want to move to a big city, the cost of living will be higher, which makes it more difficult to afford a high-priced home. Your salary will count for more in markets that are less expensive than cities like San Francisco or New York. Consider a starter home that’s more affordable but allows you to build equity for around five years. You can use this investment as a stepping stone to your dream home.
Know Your Financing Options
When buying a home, you’ll have access to many different loan types. Many borrowers request conventional loans that are backed by Freddie Mac and Fannie Mae. The main downside to this type of loan is that it can be more difficult to obtain favorable terms. VA, USDA, and FHA loans are backed by the government and are available to different types of buyers. For example, VA loans are available to veterans or active-duty members of the military.
Make sure you request mortgage preapproval from your preferred lender before you start searching for homes. Your lender will look at your financial situation to determine what your borrowing limit should be. During this process, you’ll need to share your tax returns and pay stubs. However, the preapproval letter you receive allows you to create a realistic budget. Before you buy a home, compare multiple lenders to find the best rates and fees.
Stay the Course
If you do the math and find that you aren’t in a great position to buy a home even with an annual salary of $100,000, consider taking steps to boost your savings and improve your credit before you start searching for your dream home. During this time, don’t do anything that could adversely impact your score.
For example, you shouldn’t buy a new car if you’re months away from making an offer on a home. Once you determine that you’re ready to buy a home, work with an experienced real estate agent who can help you make the best financial decision.
Conclusion
When you earn an annual salary of $100,000, you should be able to afford a $400,000 home. However, there are numerous factors you must consider when calculating how much you can afford. If your credit score is low or your savings aren’t sufficient, you’ll gain access to better terms if you spend some time improving your financial situation. Assess your finances before you make a home purchase.