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If you’re earning $100,000 per year, congratulations on entering six-figure salary territory. However, if you’re an aspiring homeowner, even this princely sum may not seem like enough.
According to a recent PYMNTS/LendingClub survey, 48 percent of people who make $100,000 or more are still living paycheck to paycheck. And recent economic trends haven’t exactly encouraged big-ticket-item purchases. Between high inflation and mortgage rates that have doubled since the beginning of 2022, buying a house can feel like a tough goal to reach on a $100,000 income.
A tough goal, but not an impossible one. Here are some considerations to help you determine how much house you can afford.
Start with the 28/36 rule
As a baseline for your budget, aim to follow the 28/36 rule — a commonly-used personal finances formula. It means you should spend no more than 28 percent of your income on your housing expenses and no more than 36 percent of your income on your total debt payments.
If you’re earning $100,000 per year, your average monthly (gross) income is $8,333. So, your mortgage payment should be $2,333 or less. Then, the rest of your debts — car payment, student loans, credit cards and any other balances you’re working to pay off — shouldn’t be more than another $667 per month: So, the 36 percent in the equation should be no more than $3,000.
However, figuring out how to buy a house involves a lot more than these two percentages. You’ll also need to consider a wide range of other variables, including how much money is in your savings account, how much you’ll pay for homeowners insurance and property taxes, how much time you want to pay back the loan and how much money you’re spending to pay off your other debts. Bankrate’s New Home Calculator can help you crunch the numbers. For example, if you can make a $20,000 down payment, you’ll be able to afford a home that costs up to $409,000 with a 30-year mortgage that has a 6 percent interest rate.
How to determine how much home you can afford
Your paychecks aren’t the only piece of estimating your buying power. Make sure you think about these other major factors to get a sense of what you’ll be able to borrow to buy a new home.
Your credit situation and debt-to-income ratio
Your credit score is the foundation of your mortgage application. While conventional lenders (banks, credit unions, etc.) will approve borrowers with a credit score as low as 620 and some FHA lenders will approve credit scores as low as 500, those low scores translate to higher rates — which will eat into your buying power. Bankrate’s mortgage calculator shows that the payment on a $320,000 loan with 7 percent interest rate is more than $200 higher than the same loan with a 6 percent interest rate.
“Before banks or other mortgage lenders extend a loan to you, they’ll look at that overall picture of your financial life,” Wil Hendrix-Griffin, a Chicago-based senior vice president at PNC Bank, says. “Lenders want to see how well you manage your current debt. Are you paying your bills on time? Are you overspending on your credit card? It’s important for lenders to see that you’re not financially overextending yourself by adding a mortgage payment to your personal finances.”
Lenders will evaluate your overall debt-to-income (DTI) ratio — which is the number that represents the 36 in the 28/36 rule. Some lenders will allow up to a 50 percent DTI, but they will look at higher levels of outstanding debt — especially high-interest credit cards — as a signal of a higher-risk borrower.
“In addition to a credit score and income, lenders will research your employment history,” Hendrix-Griffin adds. “It’s equally important to show lenders that you have a steady, reliable, long-term employment history. This shows the lender that there’s a high likelihood that you’ll be employed well into the future.”
How much of that $100,000 salary have you been able to squirrel away in a savings account? If you can afford to make a sizable down payment, you’ll be able to lower your loan-to-value ratio, which is the size of your borrowed sum divided by the worth of property you want to buy. Lenders prefer to see an 80/20 LTV, which requires a 20 percent down payment. So, on a $400,000 home, you would need to contribute $80,000 to your down payment and still have enough left over to cover your closing costs. Consider how different down payment amounts will impact your monthly costs on a $450,000 home:
|Down payment||Monthly payment|
|$90,000 (20 percent)||$2,158|
|$45,000 (10 percent)||$2,428|
|$13,500 (3 percent)||$2,617|
Based on your $100,000 salary, you would need to put down 20 percent to follow the 28/36 rule — or find a cheaper home. (Note that this example does not include other common costs of homeownership, like property taxes and homeowners insurance, which will impact your budget.)
If you can’t afford to make a 20 percent down payment, it’s okay. Ultimately, you can buy a home with a fairly small amount of money — as little as 3 percent of the purchase price on a conventional loan — in your bank account. However, in this case, you’ll also need to include private mortgage insurance (PMI) premium costs into your budget, which can add hundreds of dollars to your monthly payments. For example, a 5 percent down payment on a $450,000 home would require a $410 PMI payment per month, according to an estimate from Freddie Mac.
Your location and your must-have list
Do you absolutely have to live in the big city, where prices have skyrocketed in the past two years? Or do you have a flexible work arrangement that would allow you to consider a different section of the U.S.? Your dollars can do a lot more in some of the cheapest cities in the country than it will in Austin or Miami.
Additionally, this home purchase doesn’t have to be your forever home. If you’re simply aiming to stop renting, think about a starter home that can serve you for at least the next five years. It may not be the five-bedroom property you want, but you can start building equity right now. Then, when you’re ready to move, you can either sell your place — or perhaps consider renting it out to enjoy some passive income.
Know your different home financing options
There are loads of different financing options for buying a home, including conventional, FHA, VA and USDA loans. To get a sense of what kind of loan you can qualify for and how much you’ll be able to borrow, get preapproved for a mortgage. It’s a simple step that involves sharing your pay stubs, tax returns and other financial information with a lender.
The lender that issues your preapproval doesn’t have to be the lender that actually loans you the money to buy the home. It’s important to compare multiple lenders and review the loan estimate to get a sense of where you’ll find a combination of the lowest fees and the lowest interest rates.
Explore first-time homebuyer assistance programs
If it’s your first time buying a home, you’re in luck: There are quite a few assistance options to help make owning a home a reality. Plus, depending on where you live, your $100,000 annual earnings might put you in the category of a low- or moderate-income borrower. As the cost of living has increased around the country, plenty of states like Arizona, California and New Jersey have all upped their income limits above the $100,000 mark for applicants looking for down payment assistance. In more affordable areas, though, your $100,000 salary might be too much to qualify for help.
Stay the course
If you crunch all the numbers and you’re still wondering whether you should buy a house now or wait, patience might prove to be a good route. Already, home sales and prices are softening around the country, as is the rise in interest rates; some predict the latter might level off to six percent or so in later 2023. Certainly, the crazed seller’s markets will lessen. Over the next few years, the real estate market will definitely become more balanced between buyers and sellers, economists and real estate pros predict.
So, it may be wise to focus on saving for a down payment, take simple steps to improve your credit and delay your purchase until later in the year. Even if you sit on the sidelines, though, it’s smart to go ahead and line up the right real estate agent to have by your side. You can let them know you don’t need a house right away. But of course, if a property that looks like a perfect fit is sitting on the market, your agent can make sure you don’t miss out on the opportunity.