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An $80,000 annual salary might sound like a decent pile of money — and in fact it’s about $10K higher than the national median household income of $70,784. However, a recent Bankrate study found that financial distress can strike even those making $80,000 per year. That doesn’t mean you can’t afford a house, necessarily, but it does mean you should keep a laser focus on your budget. Read on to get a better understanding of how much house you can afford with an $80,000 salary.
The 28/36 rule
This rule of thumb is a helpful tool to shape an initial estimate for your homebuying budget. It’s simple: Don’t spend more than 28 percent of your income on housing, and don’t spend more than 36 percent of your income on your entire debt load (including that housing payment, plus auto loans, student loans, credit cards and any other outstanding balances).
Here’s how the math stacks up based on an $80K salary:
- $80,000/12 = $6,666 per month
- $6,666 x 0.28 = $1,866 (which your housing cost should not exceed)
- $6,666 x 0.36 = $2,399 (which your total debt should not exceed)
Easy enough, right? But you’ll need to factor in other numbers, too: your credit score, your savings account balance, your closing costs, your property taxes and more.
How much house can you afford?
Following the 28/36 rule, with your $80,000 income, you want your monthly housing payments to stay below $1,866. If we assume a 30-year loan at 6.5 percent interest, with a traditional 20 percent down payment, that means you can likely afford a home of about $310,000. According to Bankrate’s mortgage calculator, this scenario will result in monthly principal and interest payments of $1,567, which gives you about $300 of leeway to account for variable fees like property taxes and home insurance premiums. That is, as long as your other debt doesn’t take you beyond the 36 percent mark.
Keep in mind that there is a difference between what you can afford and what you can comfortably afford, though. Make sure you’re also thinking about your overall cost of living for other essentials — like childcare, food and transportation, for example — and planning for the unexpected with enough savings in your emergency fund.
Here are some other important factors that contribute to how much you can afford to spend on a house:
What credit score do you need to buy a house? It depends on what kind of loan you’re going to use to finance the purchase. Conventional loans come with a minimum requirement of 620, for example, while FHA loans might be had with a score as low as 500 if you put down at least 10 percent of the purchase price. But generally, the higher your credit score is, the lower your interest rate will be. And that can spell significant cost savings.
If your credit score is lower than you would like it to be, you can take steps now to give it a boost. For example, if you’re carrying a big balance on your credit cards, getting that balance as close to zero as possible can increase your score before you start looking for a lender.
“Credit scoring places greater weight on recent events,” says Greg McBride, chief financial analyst at Bankrate. “It means that making timely payments and exercising responsible debt management carry more weight as time goes on than any previous missteps you may have made.”
As you work to improve your credit score, you’ll likely make a positive impact on your debt-to-income ratio at the same time. While the 36 percent rule is a good guardrail to avoid taking on too much debt, some lenders will accept higher debt-to-income ratios. However, if your DTI exceeds 50 percent, you’re probably going to struggle to find a mortgage.
How much money have you been saving for your down payment? Depending on where you live, making $80,000 a year may not leave a whole lot of room to put more in your savings account. Having enough saved up to put down 20 percent of the home’s purchase price will save you from having to pay for private mortgage insurance, but 20 percent isn’t mandatory. A conventional loan might require just 3 percent if you qualify, for example — just remember, the more you are able to pay upfront, the less you’ll have to borrow.
Location and must-haves
Homebuying dollars go a lot further in some markets than others, and an $80,000 salary probably won’t buy you a home in, say, San Francisco or New York City. However, many of the country’s less expensive markets have median home prices well within your range.
The size and amenities of the homes you look at matter a lot, too. While you might not be able to afford a four-bedroom single-family home in your desired area, you may be able to comfortably buy a condo or a modest starter home and start building equity.
If you’re a first-time homebuyer, Jack Brennan, a broker with Second City Agents in Chicago, recommends knowing what you’re willing to do without. “You’re going to compromise on something,” he says. “It’s a matter of determining what you are willing to compromise on. For example, are you willing to be a little bit farther from town for more space?”
Home financing options
Before you start house-hunting, you need to know how big of a home loan you can actually get. Getting preapproved for a mortgage will give you a realistic idea of the amount a lender will be willing to loan you when the time comes. Not only is this very useful for budgeting, it will also serve you well when you find a house you want to make an offer on — sellers take preapproved buyers seriously.
Compare different types of loans
There are quite a few different mortgage options, so shop around for the best fit for your personal finances. Here are some of the most common:
- Conventional loans: You’ll need a minimum credit score of 620 to qualify for a conventional loan, and if you qualify you might be able to put down just 3 percent.
- FHA loans: These are great options if your credit is not perfect: Put down 10 percent with a 500 credit score or just 3.5 percent with 580.
- VA loans: These no-down payment loans are available to eligible service members and veterans.
- USDA loans: If you’re buying in a qualifying rural area, your $80,000 salary might put you in the running for a USDA loan, which are designed for low- and moderate-income borrowers.
Explore first-time homebuyer programs
If it’s your first time buying a home, you might be eligible for down payment assistance. Depending on where you’re hoping to live and how many people are in your household, an $80,000 salary could make you eligible for loans and/or grants from state and local housing authorities that can help cover a large portion of your upfront expenses, including down payment and closing costs.
Now that you know what kind of home you can afford based on an $80K salary, are you ready to buy? If not, go ahead and take some time to save up and increase your credit score. If so, before you start, find a local real estate agent to work alongside. Your affordability price point of $310,000 is less than the national median sale price, which will likely narrow your choices, so an agent who knows your area well will be especially important in locating properties that meet both your needs and your budget.