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Homeownership may feel like a daunting goal if you make $50,000 a year, particularly if you’re supporting children or other family members. After all, the national median home price is $410,200, according to the National Association of Realtors. However, all is not lost: You may be able to make the jump from renting to owning if you’re flexible, especially if you’re eligible for first-time homebuyer programs. Read on to analyze how much house you can afford on a $50,000 salary.
The 28/36 rule
Before you start shopping for a home, take a serious look at your finances — in particular, how much income you have coming in each month and how much goes out each month to cover debt and other payments.
One common rule of thumb for determining how much you should spend on housing costs is known as the 28/36 rule. Many lenders employ this guideline when looking at a borrower’s finances. According to this rule, you shouldn’t spend more than 28 percent of your gross income on housing, and no more than 36 percent on your total debt burden. That includes housing, car payments, student loans, credit cards or any other monthly payments you may have. Here’s how the math breaks down for a $50,000 annual salary:
- $50,000 / 12 = $4,167 per month
- $4,167 X 0.28 = $1,166, your maximum monthly housing payment
- $4,167 X 0.36 = $1,500, your maximum monthly debt
How much house can you afford?
According to Bankrate’s mortgage calculator, a $200,000 home with a 20 percent down payment and a 30-year-fixed mortgage at 6.5 percent interest leaves you responsible for $1,011 in monthly principal and interest costs. You’ll have $155 per month left to cover variable fees like property taxes, homeowners insurance premiums and any applicable HOA fees before you exceed the 28 percent recommendation.
In addition to your monthly income, here are some other important financial factors to keep in mind:
- Your credit score: Higher credit scores make you eligible for lower interest rates, so if yours is less-than-stellar, consider taking some time to pay down your balances and build up your credit before you start house-hunting.
- Your DTI: DTI, or debt-to-income ratio, is a measure of how much you make versus how much you spend. It’s like the 36 part of the 28/36 rule. Some lenders will allow a higher number than 36, but it will likely come with a higher rate to match.
- Your down payment: The more money you are able to put down upfront, the less money you’ll have to borrow to make your home purchase — and the lower your monthly payments will be. While 20 percent of the home’s price is traditional, that sum can be daunting for many people, and there are several mortgage options with lower down payment requirements (if you qualify).
A $200K budget is tight in today’s market — less than half the current national median home price of $410,200 — and you’ll probably be priced out of many areas. However, you still have options if you’re flexible:
- Condos and townhouses tend to be cheaper than freestanding houses, so consider those first. In Indianapolis, for example, Redfin data shows that the median price for a single-family home is slightly out of your reach at $252,000, but for a condo, it’s a much more doable $205,000.
- Be flexible geographically, too: Many cities have surprisingly affordable housing markets, if you’re willing to relocate to make your homeownership dreams come true.
- And if you don’t mind getting your hands dirty and earning some sweat equity, a fixer-upper can be a great way to get an affordable house now and renovate down the line, as you are able to.
Home financing options
An array of home financing options is available, including options specifically for buyers with low-to-moderate incomes. Your $50,000 salary might also qualify you for financial assistance, especially if you’re trying to buy your first home.
Common types of loans
- Conventional: A conventional loan, the most common type of mortgage, usually requires a minimum credit score of 620 and a minimum down payment of 3 percent (although you’ll have to pay for private mortgage insurance, or PMI, with a down payment of less than 20 percent).
- FHA: These popular loans are more flexible about credit score and DTI. But you’ll still need to pay PMI with a down payment below 20 percent.
- VA: If you are active-duty military, a veteran or a surviving spouse of either, you may be eligible for a zero-down VA loan.
- USDA: USDA loans cater to low- and moderate-income buyers in approved rural areas. If you’re looking in an approved area you may be in luck, but if you want a city home, they’re not right for you.
First-time homebuyer programs
Assistance programs for qualifying first-time homebuyers can be found at the federal, state and local level, all with the goal of making homeownership more attainable. These can include grants, savings-match programs and low-interest, deferred-payment or forgivable loans to help cover your down payment and closing costs.
Get preapproved for a mortgage
A preapproval letter from a lender shows sellers that you’re a serious and qualified buyer, which will make your offer more attractive. And — even more important when you’re watching every penny — the process will give you an accurate idea of how much a lender would be willing to loan you, which helps you budget more precisely.
Buying a home on a $50,000 salary means keeping to a strict budget, which can be both challenging and stressful. And your home-shopping price point could mean that options in your desired area are limited. But an experienced local real estate agent who knows your market well can guide you through your journey and help you find a home that you can afford. Interview several candidates, asking questions and requesting references, to find someone you feel comfortable working with.