How much house can I afford if I make $100,000 a year?

Congratulations on achieving a six-figure salary! While earning $100,000 per year is a significant milestone, aspiring homeowners may still find it challenging to break into the real estate market. According to a recent PYMNTS/LendingClub survey, 49 percent of individuals earning $100,000 or more are living paycheck-to-paycheck. Despite this, it’s important to note that $100,000 is well above the national median household income of $70,784 (source: Census data).

With recent spikes in inflation and mortgage rates, the prospect of buying a house may seem daunting. However, it’s not impossible. Here are some key considerations to help you determine how much house you can afford:

Start with the 28/36 Rule

The 28/36 rule is a widely recognized guideline for budgeting. It recommends allocating no more than 28 percent of your income to housing expenses and no more than 36 percent to total debt payments.

If your annual income is $100,000, your average monthly (gross) income is approximately $8,333. Following this rule, your mortgage payment should be $2,333 or less. Additionally, your total debt payments, including car loans, student loans, and credit card balances, should not exceed $3,000 per month.

However, keep in mind other factors like your savings, homeowners insurance, and property taxes when determining your affordability.

Can I Afford a $400,000 or $500,000 House?

Assuming a 20 percent down payment on a $400,000 house with a 30-year fixed mortgage at 6.5 percent interest, your monthly principal and interest payments would be approximately $2,022. This leaves some room for property taxes, insurance premiums, and other monthly fees, staying under the 28 percent threshold of $2,333. Hypothetically, you should be able to afford a $400,000 home. However, a $500,000 house would be pushing it, as the monthly payments would exceed your limit.

Factors Beyond Your Paycheck

Your buying power isn’t solely determined by your income. Consider these major factors to understand how much you can borrow for a home:

1. Your Credit Situation and Debt-to-Income Ratio

Maintaining a good credit score is crucial for your mortgage application. A higher credit score leads to more competitive interest rates, resulting in lower monthly mortgage payments. Lenders will also assess your debt-to-income ratio, so managing current debts responsibly is essential.

2. Your Savings

The amount you’ve saved is critical. A substantial down payment reduces the amount you need to borrow and can lead to more favorable loan terms. Aim for an 80/20 loan-to-value ratio (20 percent down payment) to avoid private mortgage insurance.

3. Your Location and Must-Haves

Consider the cost of living in your desired location. Explore less expensive markets for better affordability. Additionally, remember that your first home doesn’t have to be your forever home. A starter home can help you build equity while staying within budget.

4. Know Your Financing Options

Explore various financing options, including conventional, FHA, VA, and USDA loans. Get preapproved for a mortgage to understand how much a lender is willing to loan you, helping you set a realistic budget. Compare multiple lenders for the best terms.

Stay the Course

If you’re unsure about the timing of your home purchase, patience can be a valuable asset. Take time to bolster your savings and improve your credit score before entering the market. Avoid actions that could negatively impact your credit score. When you’re ready, enlist the help of an experienced local real estate agent.