How much house can I afford if I make $120,000 a year?

In today’s competitive housing market, even a robust salary of $120,000 can be a challenge when it comes to purchasing a home. While this income places you in the upper echelons of American earners, high mortgage rates and soaring home prices are giving pause to many prospective buyers. In this blog post, we’ll explore how to determine how much house you can afford on a $120,000 annual income, considering factors like the 28/36 rule, savings, credit score, location, and financing options.

The 28/36 Rule:

One widely recommended guideline for determining how much house you can comfortably afford is the 28/36 rule. This suggests that your monthly housing costs should not exceed 28 percent of your monthly income, and your total debt payments, including housing expenses, should not surpass 36 percent. With a $120,000 salary translating to $10,000 per month, this equates to a cap of $2,800 on monthly housing expenses. Taking into account variables like property taxes, homeowners insurance, and HOA fees, you should be able to afford a home around $470,000.

Savings and Down Payment:

Having substantial savings is advantageous in the homebuying process, as it provides a cushion for maintenance and unexpected repairs. While a 20 percent down payment is not obligatory, it comes with several benefits, including avoiding private mortgage insurance premiums, lower monthly costs, reduced interest over the loan term, and potentially securing a more competitive interest rate.

Credit Score and Debt-to-Income Ratio:

Your credit score plays a pivotal role in your mortgage application. Higher scores lead to better interest rates, while lower scores may result in higher borrowing costs. Lenders also scrutinize your debt-to-income ratio, assessing the percentage of your income allocated to debt payments.

Location and Amenities:

With a budget of $470,000, you have options above the national median price. However, the value of your budget can vary significantly depending on location. In some areas, like Indianapolis, your budget can buy a spacious home with upgrades and land, whereas in pricier metros like San Diego, it may not stretch as far.

Home Financing Options:

Getting preapproved for a mortgage is essential in understanding your borrowing capacity and demonstrating your seriousness to sellers. There are various types of home loans available, each with its own advantages and considerations. Given your higher income, putting down a larger down payment can be beneficial in the long run.

First-Time Homebuyer Programs:

If you’re a first-time homebuyer, the prospect of saving for a down payment might feel overwhelming. However, there are numerous national, state, and local programs offering grants, low-interest loans, or forgivable loans to ease this financial burden. Eligibility for these programs is often income-based, so it’s worth exploring whether you qualify based on your $120,000 salary.

Conclusion:

While a $120,000 annual salary can afford you a comfortable home in most parts of the country, the current high mortgage rates may limit your buying power. It’s crucial to carefully consider your financial circumstances, desired location, and the state of the market before making a decision. Additionally, seeking guidance from an experienced local real estate agent can be invaluable in navigating the complexities of the housing market.