How much should you spend on house based on salary

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If you can’t afford to pay cash for a house, you’re likely going to need a mortgage. And you’re not alone—87% of homebuyers had to finance their home purchase in 2021, according to the National Association of Realtors (NAR). Before you get a mortgage, it’s critical to know how much home you can afford, especially as homes become more expensive.

We’ll walk you through how to calculate how much home you can afford in more detail.

Estimate Your Monthly Payments with an Affordability Calculator

Calculator provided by Better Mortgage.

How to Calculate How Much House You Can Afford

Let’s go over some of the inputs to our home affordability calculator, plus some extra factors you’ll want to consider.

Income

Income is the most obvious factor in how much house you can buy: The more you make, the more house you can afford, right? Yes, sort of; it depends on how much of your income is already spoken for through debt payments.

Debt

You might be making payments on a car loan, credit card, personal loan or student loan. At a minimum, lenders will total up all the monthly debt payments you’ll be making for the next 10 months or longer. Sometimes they will even include debts you’re only paying for a few more months if those payments significantly affect how much monthly mortgage payment you can afford.

What if you have a student loan in deferment or forbearance and you’re not making payments right now? Many homebuyers are surprised to learn that lenders factor your future student loan payment into your monthly debt payments. After all, deferment and forbearance only grant borrowers a short-term reprieve—much shorter than your mortgage term will be.

Debt-to-Income Ratio, or DTI

The calculator doesn’t display your debt-to-income (DTI) ratio, but lenders care a lot about this number. They don’t want you to be overextended and unable to make your mortgage payments.

There are two types of DTI: front-end and back-end.

Front-end only includes your housing payment. Lenders usually don’t want you to spend more than 31% to 36% of your monthly income on principal, interest, property taxes and insurance.
Let’s say your total monthly income is $7,000. Your housing payment shouldn’t be more than $2,170 to $2,520.

Back-end DTI adds your existing debts to your proposed mortgage payment. Lenders want your back-end DTI to be no higher than 43% to 50%, depending on the type of mortgage you’re applying for and other aspects of your finances, like your credit score and down payment.

Let’s say your car payment, credit card payment and student loan payment add up to $1,050 per month. That’s 15% of your income. Your proposed housing payment, then, could be somewhere between 26% and 35% of your income, or $1,820 to $2,450.

Down Payment

The bigger your down payment, the more house you can afford. Once you can put down 20%, you won’t have to pay for mortgage insurance. That frees up more cash to put toward principal and interest.

Credit Score

The higher your credit score, the more house you can afford for the same down payment. A higher credit score will get you a lower interest rate, and the lower your interest rate, the more you can afford to borrow.

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Other Factors that Affect How Much House I Can Afford

Next, you’ll need to do some research. As long as you know your credit score, it’s easy to estimate what your monthly mortgage payment will be using a mortgage calculator. But how much will you pay for everything else?

Closing Costs

Closing costs, which will run you about 2% to 5% of the purchase price, will affect how much home you can afford to a greater or lesser extent depending on how you pay for them.

• If you pay closing costs in cash, and if that means you have a smaller down payment, you might not be able to buy as much house.
• If you need to finance closing costs by adding them to your mortgage principal, you might have to buy a commensurately less expensive house.

The best-case scenario is getting the seller to pay closing costs without increasing the purchase price. It may be hard to get this concession in a seller’s market, but it may be doable in a buyer’s market.

Property Taxes

Check the county assessor’s website and local real estate listings to get an accurate idea of the property tax rates in the area where you’re buying. Nationwide, rates range from 0.30% to 2.13% of the home’s assessed value. Assessed value may be lower than market value, thanks to homestead exemptions.

Homeowners Insurance

Homeowners insurance costs more in places where homeowners file more claims. These tend to be places with more crime or storms. A local insurance agent might be happy to give you an idea about prices in the area since you could become a future client. If you just want to ballpark it, the national average annual premium for a $250,000 home is about $1,100 (about $92/month).

Mortgage Insurance

Are you putting down less than 20%? Expect to pay mortgage insurance premiums for at least a few years. They’ll cost 0.17% to 1.86% per year per $100,000 you borrow, or $35 to $372 per month on a $250,000 loan.

If you’re getting a conventional loan with less than 20% down and will have to pay private mortgage insurance (PMI), try to minimize this expense. The larger your down payment and the better your credit score, the lower your PMI rate and the fewer years you’ll have to pay it for.

Flood Insurance

Some homes are in a special flood hazard area; this means you’ll probably be required to buy flood insurance. Other homes are in locations where lenders will not require you to buy flood insurance. However, you might want to purchase it anyway after investigating the area’s flood risks. You can get a flood insurance quote from the National Flood Insurance Program, but private insurers may be able to offer a better deal.

Homeowners Association Fees

Realtor.com says a typical HOA fee is $200 to $300 a month. Fees depend on how many amenities the community has, how many services it requires, and how much upkeep it needs. Local real estate listings can give you an idea about the homeowners association fees in the neighborhoods, condos or townhomes you’re interested in.

Home Maintenance

Home maintenance will cost money, and the larger and older the home, the more upkeep you’ll have to budget for. In a shared building, the HOA might take care of most maintenance. But if you’re buying a house, you’ll need to set aside money each month for the new roof you’ll need one day, the fresh paint on the exterior, the air conditioner repairs and all the other expenses of home ownership.

Budget 1% to 4% of your home’s value each year for home maintenance. You might not spend this amount each year, but you’ll spend it eventually.

Utilities

You’ll also need to estimate your future home’s utility bills for electricity, gas, trash and water. You might not be paying for all of these expenses where you live now, or you might be paying less for them because you’re in a smaller place than your future home will be. To get an idea of the costs, ask people who already live in the area where you want to buy.

Living Expenses

Now, factor in your other monthly expenses: gas, car insurance, health insurance, groceries, entertainment, pet stuff, kid stuff, retirement contributions, emergency savings, travel, streaming services and cell phone service. Lenders won’t consider these costs when they decide how much to lend you. You need to consider them to know what you can actually afford.

Cash Reserves

Loan requirements for cash reserves usually range from zero to six months. But even if your lender allows it, exhausting your savings on a down payment, moving expenses and fixing up your new place is tempting fate.

You’ll often hear that you should have three to six months’ worth of living expenses saved to cover emergencies. As a homeowner, you’d be wise to have six months to two years’ worth of living expenses saved. You never know when a global pandemic might wreak havoc on your ability to earn a living and pay for your home.

How the Loan You Choose Can Affect Affordability

The loan you choose can also affect how much home you can afford:

• FHA loan. You’ll have the added expense of up-front mortgage insurance and monthly mortgage insurance premiums.
• VA loan. You won’t have to put anything down and you won’t have to pay for mortgage insurance, but you will have to pay a funding fee.
• Conventional loan. If you put down less than 20%, private mortgage insurance will take up part of your monthly budget.
• USDA loan. Both the upfront fee and the annual fee will detract from how much home you can afford.

How Much House Can I Afford With an FHA Loan?

If your mortgage loan is backed by the Federal Housing Administration (FHA), you’ll have the added expense of up-front mortgage insurance and monthly mortgage insurance premiums.

How Much House Can I Afford With a VA Loan?

If you have a VA loan, guaranteed by the Department of Veterans Affairs, you won’t have to put anything down or pay for mortgage insurance, but you will have to pay a funding fee.

How Much House Can I Afford With a Conventional Loan?

If you are taking out a conventional loan and you put down less than 20%, private mortgage insurance will take up part of your monthly budget. The PMI’s cost will vary based on your lender, how much money you end up putting down, as well as your credit score. It is calculated as a percentage of your total loan amount, and usually ranges between 0.58% and 1.86%.

How Much House Can I Afford With a USDA Loan?

USDA loans are issued or guaranteed by the U.S. Department of Agriculture. Both the upfront fee and the annual fee will detract from how much home you can afford.

What to Do if You Want More Home Than You Can Afford

We all want more home than we can afford. The real question is, what are you willing to settle for? A good answer would be a home that you won’t regret buying and one that won’t have you wanting to upgrade in a few years. As much as mortgage brokers and real estate agents would love the extra commissions, getting a mortgage twice and moving twice will cost you a lot of time and money.

The National Association of Realtors found that these were the most common financial sacrifices homebuyers made to afford a home:

1. Cut spending on entertainment
2. Cut spending on clothes
3. Canceled vacation plans
4. Paid minimum payments on bills
5. Earned extra income through a second job
6. Sold a vehicle or decided not to purchase a vehicle

These are all solid choices, except for making only the minimum payments on your bills. Having less debt can improve your credit score and increase your monthly cash flow. Both of these will increase how much home you can afford. They will also decrease how much interest you pay on those debts.

Consider these additional suggestions for what to do if you want more home than you can afford:

• Pay down debt, especially high-interest credit card debt and any debt with fewer than 10 monthly payments remaining
• Work toward excellent credit
• Ask a relative for a gift toward your down payment, especially if you can demonstrate your own efforts toward becoming an excellent candidate for a mortgage

Two of the most common reasons for buying a home, according to the National Association of Realtors survey, were to have a larger home or to be in a better area. If you can manage to get both of those things upfront, you might not ever have to move.

Frequently Asked Questions (FAQs)

How much house can you afford?

There are a number of factors that go into the underwriting process for a mortgage. Some of these factors determine whether you qualify for a loan. Other factors go to what interest rate you’ll pay. In combination, all of these factors influence how much you can borrow.

Your Debt-to-Income Ratio

Mortgage lenders look at what’s called your debt-to-income (DTI) ratio. In simplest terms, DTI compares your monthly minimum debt payments to your gross income. Your DTI ratio has two components: the front-end ratio and the back-end ratio.

Front-End Ratio

The front-end ratio compares your monthly housing costs to your monthly income. To calculate your front-end ratio, divide your expected mortgage payment, including taxes and insurance, by your gross monthly income.

Historically, banks wanted to see a front-end ratio no higher than 28%. In other words, for every $1,000 in monthly income, a potential home buyer could allocate no more than $280 to housing costs. Today, this rule has been relaxed, and the focus has shifted to the back-end ratio.

Back-End Ratio

The back-end ratio compares all of your monthly debt payments to your monthly income. To calculate your back-end ratio, divide your entire monthly debt, including your expected mortgage payment, car payment, credit cards, student loans and other monthly payments, by your gross monthly income.

Historically, banks wanted to see a back-end DTI no higher than 36%. Along with the front-end ratio, these DTI measures are known as the 28/36 rule.

The 28/36 rule is a guideline. Lenders can vary these parameters based on a borrower’s credit score, potentially allowing higher scoring borrowers to have a slightly higher debt to income ratio. Furthermore, government programs can allow for higher DTI Ratios.

According to the Consumer Financial Protection Bureau (CFPB), a 43% back-end DTI is the highest ratio a borrower can have and still get a Qualified Mortgage. A Qualified Mortgage (QM) is one that meets certain standards designed to protect borrowers. Among other things, a QM requires that a borrower’s total debt payments not exceed 43% of their gross monthly income.

This is not to be confused with loans meeting requirements set by Freddie Mac and Fannie Mae, which have their own DTI requirements. Fannie Mae and Freddie Mac loans allow back-end ratios of 45% to 50% with compensating factors, such as plentiful assets or a larger down payment.

As liberal as the DTI requirements have become, their importance cannot be overstated. According to the NAR report cited above, of the mortgage applications that were denied, 17% were denied because the DTI requirements weren’t satisfied.

Your Credit Score

An individual’s credit history is a major factor in the mortgage process. It’s a big factor in determining the interest rate, which in turn affects your monthly payment and DTI. It can even affect the required down payment. According to the FHA, applicants are required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently around 3.5 percent.

This difference in credit scores can amount to tens of thousands of dollars over the life of a loan. According to myfico.com, a person with a FICO score of 760 or better will enjoy a significantly lower mortgage rate than a person with a FICO score of 620. Thus, to understand how large a mortgage you can get, you must know your FICO score.

Your Down Payment

The size of your down payment is another factor that determines how much house you can afford. The down payment comes into play for several reasons.

First, and most obvious, the larger the down payment, the more you can afford to spend on a home, all other things being equal.

Second, the size of your down payment can affect your monthly mortgage payment. For down payments of less than 20 percent, buyers are usually required to pay for private mortgage insurance (PMI). This additional payment increases your monthly housing costs, thus affecting your front-end and back-end DTI ratios. Ideally, buyers should aim to make a down payment of 20 percent or more to avoid PMI. (Note: PMI protects the lender, not you, so it’s an expense that’s best avoided.)

Third, your down payment can affect your interest rate. Generally, a larger down payment means a lower interest rate, according to the CFPB. The lower rate not only brings down your monthly payment, but it also lowers your DTI ratios.

Bringing It All Together

As you can see, there are a number of factors that determine how large of a mortgage you can get. If you get access to your FICO score and crunch some numbers, you can get a rough idea of your borrowing capacity. You can also seek assistance from your bank or a mortgage broker.

All of this, however, still leaves one important question.

How much should you spend on a home?

Just because a lender will give you a certain loan amount doesn’t mean it’s a smart decision. In fact, borrowing the maximum is often a grave mistake. What’s more, rules of thumb fall short. What DTI ratio might be comfortable for a family earning $250,000 a year might not work for a family earning $75,000 a year, as financial planning guru Michael Kitces has pointed out.

Instead, consider the following factors as you determine what’s best for your situation.

Have you accounted for your other financial goals? Here you might consider retirement savings in a 401(k) or IRA, saving for a child’s education, and saving for emergencies.

Are you qualifying for a mortgage based on one or two incomes? If you are using two incomes, do you plan for one spouse to stay home with children at some point? Are both incomes secure, or is there a meaningful risk of losing an income without a ready replacement? If so, the loss of one income should be considered in the decision.

Are you buying a new home or a fixer-upper? If it’s a fixer-upper, you should consider the costs necessary to renovate the home.

In other words, make sure the proposed mortgage fits in with your lifestyle and other financial goals. Ultimately, remember to ask how much house can you afford while still being able to enjoy the other things in life.

How much house can I afford with a 100k salary?

First of all, this will depend on where you are looking to buy. While housing prices have jumped nationally, they can still vary widely in terms of affordability when broken down by local area.

A general guideline when calculating how much home you can afford with your salary is to multiply your income by at least 2.5 or 3. This should give you an idea of the maximum housing price you can afford.

For example, with a $100,000 annual salary, you can afford a $300,000 house based on the maximum multiplier. However, you might be able to afford a more expensive home if you can secure a low interest rate or have enough money saved up for a large down payment.

What is a good income to buy a house?

Once again, the answer to this question will depend on where you want to buy and what kind of property you want. Your credit score and DTI will also be important factors in determining what interest rate and loan terms you get from the lender.

The higher your credit score, the better the interest rate you are offered; therefore, you might be able to own a higher priced home than someone with a low credit score.

What credit score is needed to buy a house?

Most lenders want you to have a credit score of at least 620 to get a conventional loan. However, it is possible to get a mortgage with a bad credit score, but you will have to put more money down or pay a higher interest rate.

How much of my income should go towards paying a mortgage?

There are no set rules regarding how much of your income should cover a mortgage payment. However, lenders will look at how much of your income is going to other outstanding debts before approving another loan. Check out this guide for the different methods for determining how much of your income should go to your mortgage.

How much savings should I have before buying a house?

This depends on how much you intend to put up as a down payment. If you pay less than 20% of the sales price, you will have to pay PMI as part of your monthly repayments. You will also need to pay for mortgage closing costs. It’s a good idea to have at least $3,000 to $10,000 saved up to cover these costs or unexpected expenses along the way.

Is it a good idea to put a large down payment on a house?

It only makes sense to make a large down payment if you have a lot of cash on hand and would like to avoid paying PMI or reduce your monthly payments. If making a large down payment would erase your financial reserves for future emergencies, then this is not a good idea.