How much house can I afford with my salary?

Arundhati Sampath / Oct 22, 2024 / Home affordability

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How should I think about home affordability?

While thinking about how much house you can afford, there are many important considerations. Lenders will consider standard metrics such as debt-to-income ratios  and expect that not more than 28% of gross income is spent on all home related expenses or not more than 36% of gross income be spent on all loans and debt, including home loans. Additionally, they also look at your gross income and how much down payment you can afford, in order to determine how much home value they will approve you for. And of course, interest rates and property tax rates are also an important determinant of how much home you can afford.

However not all individuals and families are the same, so what works for one individual or family may not work for another, even if the debt-to-income ratios or gross income are the same. It is important to think about your lifestyle, expenses and other goals you might have. For example, if you want to retire early or fully fund kids’ college, you might decide to buy a less expensive home. Or if you really want that nice house in a great neighborhood, you may choose to spend more on housing and cut back on many other expenses and hobbies. At the end of the day, our lifestyle, expenses and income are the biggest determinants of home affordability.

How much house can I afford with $100,000 salary?

Consider someone with an income of $100,000 and monthly car or student loans of $400. Assuming mortgage rates of 6.72% and down payment of $50,000, you may be approved for $383,000 with a debt-to-income ratio of 36%.

But is this the right home value for everyone with the same income?

What if you are a frugal person and can control your living expenses? In that case you may be able to afford a more expensive home. Or alternatively, if you tend to have a higher expense level, you may only be able to afford a lower home value.

Let us consider a few different scenarios.

  • Frugal lifestyle at 42% of take home Pay:If you are more frugal and your expenses are only 42% of Take Home Pay, you might be able to afford a home value of $419K. Of course, this may be constrained by the maximum that lenders will approve you for, but you know that you could perhaps be more aggressive in your choice of home.
  • More expensive lifestyle at 60% of take home pay: You might find that you can only afford $287K of home value. In this case your options may be to find a less expensive home in a lower cost of living area. Or you could cut down your expenses.

How much house can I afford with a $200,000 salary?

Now imagine your salary takes a big jump and you can achieve an income of $200K per year. Of course you’d expect your home affordability number to improve significantly. We make the same assumptions as earlier and keep things simple. 

  • Frugal lifestyle at 42% of Take Home Pay: You might be able to afford a home value of $799K. Of course, this may be constrained by the maximum that lenders will approve you for, but you know that you could perhaps be more aggressive in your choice of home.
  • More expensive lifestyle: On the other hand, if you tend to have a higher expense level, at say, 60% of Take home pay, you might find that you can only afford $550K of home value. In this case your options may be to find a less expensive home in a lower cost of living area. Or you could cut down your expenses.

How much house can I afford with a $80,000 salary?

Now consider someone with an income of $80,000 per year. Let us make similar assumptions that they put away 10% of their gross income towards 401K, and they have saved up $50,000 for down payment. Now let us crunch the numbers.

  • Frugal lifestyle at 42% of Take Home Pay: You might be able to afford a home value of $340K. Of course, this may be constrained by the maximum that lenders will approve you for, but you know that you could perhaps be more aggressive in your choice of home.
  • More expensive lifestyle: At expense levels at 60% of take home pay, you might find that you can only afford $233K of home value. In this case your options may be to find a less expensive home in a lower cost of living area. Or you could cut down your expenses.

How much house can I afford with a $60,000 salary?

Again, to keep things simple, we go with the same assumptions of down payment, interest rates and 401K savings rate as before. Let us see how the numbers stack up. 

  • Frugal lifestyle at 42% of Take Home Pay: You might be able to afford a home value of $262K. Of course, this may be constrained by the maximum that lenders will approve you for, but you know that you could perhaps be more aggressive in your choice of home.
  • More expensive lifestyle: On the other hand, if you tend to have a higher expense level, at say, 60% of Take home pay, you might find that you can only afford $179K of home value. In this case your options may be to find a less expensive home in a lower cost of living area. Or you could cut down your expenses.

Conclusion

So as you can see, it would be wise to make a home affordability decision based on many nuanced factors such as your lifestyle and expense levels – and not just rely on standard rules of thumb, which may not take into account your personal situation. Additionally, you should also think about other goals such as retirement or college savings for kids. These may also influence whether you want to spend more on a home – or not.

By making sure you plan your finances and your future goals, you can figure out the right amount to spend on a new home, tailored to your unique situation.

Start planning now and let your future self thank you!

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