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With a salary of $90,000 a year, you’re earning well above the nation’s median household income — which, according to U.S. Census data, is $70,784. But is it enough to afford a new home purchase?
Salary isn’t everything when it comes to homebuying, of course. Economic factors such as mortgage interest rates make a big difference, as do personal finance details like your savings, debt and credit score. Here are some things to consider when trying to figure out how much house you can afford on a $90,000 salary.
The 28/36 rule
To determine how much house you can actually afford, you need to know how much of your income can be dedicated to housing costs without stretching yourself too thin. One tried and true guideline is known as the 28/36 rule, or the 28 percent rule. Many lenders use this rule of thumb to help them determine how much consumers can safely borrow.
The 28/36 rule says you should spend no more than 28 percent of your gross income on housing, and no more than 36 percent on all debt, including housing, car payments, student loans, credit cards, etc. If you earn $90,000 per year, your monthly income comes to $7,500. So your monthly housing payments should be no more than 28 percent of that, or $2,100.
How much house can you afford?
According to Bankrate’s mortgage calculator, purchasing a $350,000 home with a 20 percent down payment and a 30-year-fixed mortgage at 6.5 percent interest would yield monthly principal and interest payments of $1,769. That leaves $331 per month to account for property taxes, homeowners insurance premiums and potential HOA fees to get you up to approximately $2,100 per month, following the 28/36 rule. So, following this rule, you should be able to afford a home of about $350,000.
Don’t forget that the city or town you’re looking to buy in makes a big difference in how far your money will go. For example, in some markets that $350,000 will buy you a spacious freestanding house, but in others, it might cover just a small apartment or condo.
As helpful as the 28/36 rule is, there’s much more to consider when buying a house. “The most important factors for mortgage applicants continue to be credit history; income and employment stability; and ratio of debt-to-income,” says Greg McBride, CFA, Bankrate’s chief financial analyst. Here are some factors to keep in mind:
The amount you have to borrow to finance your home purchase is directly related to how much you pay upfront as a down payment. The higher your down payment, the lower your mortgage payment will be, since you are reducing the size of the loan — this is known as the loan-to-value ratio, or LTV.
If you put down less than 20 percent, most lenders will require private mortgage insurance (PMI), which adds an additional monthly charge to your payments. While this is not ideal, obviously, it doesn’t necessarily stay in effect for the lifetime of the loan. “Paying private mortgage insurance isn’t the end of the world, and if you get a spurt of appreciation in the next few years, you can drop it with an appraisal showing you have 20 percent equity,” says McBride.
Your credit score is the key that unlocks the interest rate you will pay on your home purchase. The higher your score, the lower the interest rate you will qualify for — and, more importantly, the lower your monthly payments will be. When it comes to rates, even a half-point can make a big difference: For example, for a $280,000 loan (that’s a $350,000 home minus a 20 percent down payment), with a 30-year mortgage at 6.5 percent, monthly principal and interest payments come to $1,769. At 7 percent, that payment jumps to $1,862 — nearly $100 more per month, which can really add up over the length of a 30-year loan.
Lenders typically look for a credit score of at least 620 or higher for conventional loans. Several types of loans can be had with lower scores, as well — but they will likely require private mortgage insurance, which is an additional monthly charge.
Lenders will also evaluate your overall debt-to-income ratio, or DTI. This is essentially the 36 in the 28/36 rule: a measurement of your total income versus your total debt. This helps lenders evaluate how responsible you are in handling debt. Generally speaking, the lower your DTI the better. Lenders prefer to see 36 percent or lower, but in some cases, DTIs of up to 50 percent may be permitted.
Home financing options
There are many ways to finance a home purchase, from conventional loans to specialized government-backed options. Financial help is often available as well, especially for first-time homebuyers, though a $90,000 salary may make you ineligible for these programs.
Different types of loans
- Conventional: This most common type of loan is available through banks, credit unions and online lenders. They typically require a minimum credit score of 620 and a minimum down payment of 3 to 5 percent, though putting down less than 20 percent will require PMI.
- FHA: Federal Housing Administration–backed loans are popular because they have lower down payment and credit score requirements. As with conventional loans, any down payment below 20 percent requires a mortgage insurance premium.
- VA: If you are active duty military, a veteran or a surviving spouse of either, you might qualify for a zero–down payment loan backed by the Department of Veterans Affairs.
- USDA: Since USDA loans are designed for low- and moderate-income buyers in rural areas, your salary may make you ineligible for this option.
Get preapproved for a mortgage
Regardless of what type of loan you’re interested in, get preapproved for a mortgage before you start house-hunting. This process will give you a realistic picture of how much a lender will be willing to loan you and tag you as a qualified buyer, making you more attractive to sellers.
“Buyers need every edge they can get, especially at a time when the number of homes for sale is so limited,” McBride says. “Getting preapproved shows the seller that your offer is legitimate because you’ll be able to get the mortgage needed for the sale to go through. A preapproval is stronger than a prequalification because the lender takes a deeper dive on your finances and does some of the underwriting they’ll do with an application.”
Importantly, you don’t have to get your actual loan from whoever provides your preapproval. In fact, it’s best to compare offers from multiple lenders to determine who will provide the lowest fees and interest rates.
After crunching the numbers, you may still wonder if you should buy a house now or wait. Perhaps you’d like to save up just a bit longer, or get one more bump in salary before committing.
“Your stage of life is the best indicator of when you need to buy and often dictates the entire time frame, right down to moving day,” says McBride. ”If you need the space because a baby is on the way, if you want to be settled before the kids start the new school year, if you are now caring for an aging relative — those are the real determinants of the timing, rather than trying to gauge what is going to happen with home prices and inventory months into the future.”
Buying a home can be confusing, but remember that you don’t have to go it alone. A knowledgeable local real estate agent can be an invaluable guide on your real estate journey. Let a pro put their expertise to work for you and find you the right home for your salary and your lifestyle.