What income do I need to afford a $700,000 house?

Dreaming of a home that comes with a $700,000 price tag? While it may sound steep, understanding the financial aspects can make this dream a reality. In this blog post, we’ll break down the numbers and explore key factors that influence how much you can afford when purchasing a home.

Calculating Affordability:

To begin, let’s use Bankrate’s mortgage calculator to determine what it takes to own a $700,000 home. Assuming a 30-year fixed mortgage, a 20 percent down payment of $140,000, and an interest rate of 6.5 percent, your monthly principal and interest payment would be $3,539. When accounting for property taxes, homeowners insurance, and potential HOA fees, rounding up to $4,200 per month brings your total annual housing bill to $50,400.

Following the common rule of thumb that advises not spending more than a third of your income on housing, the minimum salary required to afford this home purchase would be $151,200 annually.

The 28/36 Rule:

The 28/36 rule, a widely accepted guideline in real estate, suggests allocating no more than 28 percent of your total monthly income towards housing costs, and no more than 36 percent towards overall debt payments, including housing.

For the annual income of $151,200, this translates to approximately $3,528 per month, which aligns closely with the monthly principal and interest figure calculated earlier. Remember to factor in variable monthly fees like property taxes and insurance premiums.

Additional Considerations:

Beyond the sticker price of the property, several other factors play a crucial role in determining affordability:

1. Down Payment: A larger down payment means borrowing less, resulting in smaller monthly mortgage payments.
2. Loan-to-Value Ratio (LTV): Your down payment determines how much of the home’s total value you are borrowing.
3. Mortgage Rate: Even a slight change in interest rates can significantly impact your overall payments over the life of the loan.
4. Credit Score: A higher credit score increases your chances of securing a lower mortgage rate.
5. Debt-to-Income Ratio (DTI): Lenders consider your gross monthly income against your monthly debt obligations.
6. Financing Options: Research various types of financing and explore potential assistance programs offered by local governments, especially for first-time buyers.

Stay the Course Until Closing:

After going into contract on a home purchase, it may take weeks or even months until the closing process. During this time, avoid making major financial decisions or changes that could affect your credit score or financial status.

Conclusion:

Navigating the path to your dream home involves careful consideration of various financial factors. By understanding these key elements, you can confidently approach the process of purchasing a $700,000 home. Remember, while a higher budget may be within reach, it’s essential to choose a home that aligns with your financial goals and lifestyle.