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If you’re bringing in $175,000 per year, you’re well ahead of the game. Those earnings far outpace the average U.S. salary, representing more than double the median income of American workers, per the latest U.S. Census data. That gives you the means to claim a larger residence with more amenities than many home shoppers, and probably with a more coveted address as well.
But the amount you can afford to spend on a home depends on more than just your annual salary. Factors like your credit score, debt-to-income ratio, savings and location matter a lot. Current mortgage rates and the type of home loan you pick will also significantly affect your purchasing power. Learn more about the funds and financing needed to purchase your desired home here.
The 28/36 rule
This popular personal finance formula breaks down your gross monthly income and estimates how much you can afford to spend monthly, including housing expenses. The 28/36 rule advises spending no more than 28 percent of your income on your housing costs, and no more than 36 percent on debt payments overall.
“The benefits of following this rule are that it helps you avoid taking on too much debt and ensures that you will have enough income to cover your expenses,” says Ryan Zomorodi, a real estate investor and co-founder of RealEstateSkills.com.
Let’s do the math. A $175,000 salary is equal to $14,583 per month in gross income; 28 percent of that comes to $4,083. So, according to the 28/36 rule, the maximum amount you should spend on housing is $4,083 per month. The 36 part of the rule, the sum you should not surpass in total debt, is 36 percent of $14,583, which is $5,250. The difference between these amounts, $1,167, is the maximum amount you should spend on other debts each month.
The 28/36 ratios are a useful guideline, not a legal requirement. But many lenders do employ this rule of thumb to calculate how much you can comfortably afford — and therefore, how much they might be willing to loan you — so it’s a great place to start.
How much house can you afford?
While the 28/36 rule is helpful, there are other ways to help determine how high of a home price you can swing on $175,000 a year. Here are some important factors to consider:
Your down payment
For any homebuyer, the more money you pay upfront, the less money you have to borrow to pay for the rest — and so, the lower your monthly mortgage payment. Lenders of conventional loans typically prefer that you make a down payment of at least 20 percent of the home price, which is a healthy sum of cash. Depending on the type of loan you get, this may not be required, though: Some require as little as 3.5 percent or even no money down at all. (Your high salary may make you ineligible for some of the cheaper options.) In addition, a down payment of less than 20 percent usually requires you to pay for private mortgage insurance, which is an added monthly expenditure.
“Assuming a 20 percent down payment and a 30-year fixed-rate mortgage, a household earning $175,000 may be able to afford a home with a purchase price of around $625,000,” says Donny Schulze, producing sales manager for Embrace Home Loans in Long Island, New York. “But this estimate can vary depending on interest rates, location and your existing debt obligations.” You may be able to afford more — or less — depending on your personal circumstances.
Your credit score
When financing a home, your three-digit credit score plays a significant role in determining which loans and interest rates you qualify for. Conventional loans usually require a minimum 620 credit score, but the higher the better: “Typically, a higher score will result in a lower interest rate, while a lower score will result in a higher interest rate,” says Schulze. In other words, someone who makes $175,000 with a 620 credit score will pay more for the same loan than someone who makes the same $175,000 with a 720 credit score.
Another valuable metric to explore is your debt-to-income ratio or DTI, which can be calculated by dividing your total monthly debt payments by your total gross monthly income. This number helps lenders determine whether you will make monthly payments as planned and repay your loan on time: The lower your DTI, the more reliable a borrower lenders will see you as. A higher DTI indicates that you may have a harder time paying your monthly debts.
“Lenders typically prefer a DTI of 36 percent or lower,” Zomorodi says. “For example, if your monthly debt payments are $2,000 and your monthly income is $14,583 — based on a $175,000 annual income — your DTI would be around 14 percent, an attractive number to a lender.”
Your preferred home style and location
Finally, factor in the house itself — the location, type and size of residence you’re looking to purchase. A big, well-appointed house in a popular market will be more expensive than a cozy cottage in a rural area, and will probably require borrowing more cash. Keep in mind too that your salary will go further in some markets than others, and that upkeep costs can vary greatly by property type.
“Remember that a portion of your housing expenses is your property taxes and homeowners insurance, which can vary dramatically depending on location, property, home size and amenities,” says Schulze.
Home financing options
Your $175,000 salary should make you an attractive candidate to many banks and lenders.
- Conventional loans: To be eligible for this most common type of mortgage loan, you will likely need a 620 credit score minimum and a down payment of at least 3 to 5 percent. But any down payment amount less than 20 percent will require private mortgage insurance.
- FHA loans: Backed by the Federal Housing Administration, FHA loans are popular with first-time buyers thanks to their lower down payment and credit score requirements. To qualify, plan on coming up with a 10 percent down payment if you have a credit score of at least 500, or a 3.5 percent down payment with a credit score of 580 or above.
- VA loans: To be eligible for a VA loan, guaranteed by the U.S. Department of Veterans Affairs, you must be an active duty military service member, veteran or surviving spouse. Participating lenders often require at least a 620 credit score and may impose other restrictions, too.
- USDA loans: Your salary will likely make you ineligible for this zero-down-payment home loan aimed at low- and moderate-income buyers in rural locations.
- First-time homebuyer programs: As a high-income earner, you’re also unlikely to qualify for these financial assistance programs, which typically offer help to first-time buyers in the form of a second loan or a grant.
Ready to start house-hunting? It’s a good idea to get preapproved for a mortgage first. Doing so will give you a better idea of how much lenders are comfortable loaning you, and it will position you more favorably when you make an offer on a home. Once you’re ready to move forward with a full loan application, you’re under no obligation to stick with the same company that issued your preapproval.
After you’ve crunched the numbers, it’s time to recruit a skilled real estate agent experienced in your desired market. Ask friends and family for recommendations, and interview a few candidates to find one you can work well with. The better your agent understands you and what you want in a new home, the better they’ll be able to help you find it.