How much house could you afford with a median income?
It can be complicated to decide how much you can afford to spend on a house. After all, your monthly mortgage payment is just one of your obligations. You'll need to factor in other homeownership costs too.
In general, lenders set maximum limits on the amount you can borrow. And while you may want to take a smaller mortgage than you're permitted, you obviously can't borrow more than the mortgage lender would authorize.
As a result, the amount you can afford to spend is often capped by the size of the mortgage you can qualify for. So, what if you earn the median income? How much house could you afford to buy?
How much could you afford to spend on a home with the median income?
When mortgage lenders determine the amount you're allowed to borrow, they look at something called your debt-to-income ratio. This is your income, relative to the total you spend on debt each month, including your monthly mortgage payment. So when you're calculating how much house you can afford with a median income, you need to start by looking at your debt-to-income ratio.
According to the Federal Reserve Bank, median household income in the United States was $68,703 in 2019. And while requirements vary by lender and loan type, your debt-to-income ratio generally needs to be below 50%. Some mortgage loan providers have stricter requirements, with many preferring you to keep the ratio below 36%. And you may even be able to qualify for certain government-backed loans with a higher debt-to-income ratio. In general, though, 50% is a reasonable place to start.
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Assuming you had no other debt at all besides your mortgage, you could theoretically afford a total monthly payment of $2,862.63 per month.
There are some caveats here. Lenders might not allow housing expenses to account for the full 50% of debt you're allowed. Many prefer to see just 28% of your monthly income going to housing costs. And even if lenders do allow you to borrow so much, most experts recommend you keep your housing costs to 30% or less of your home loan.
But, let's theoretically assume you can qualify for a housing payment worth 50% of your income. The next step is to figure out what a payment of that size would enable you to buy.
Your mortgage payment with no other debt
Lenders factor in principal, interest, taxes, and insurance when they determine your mortgage payment to calculate your debt-to-income ratio. These will obviously vary. However, based on The Ascent's mortgage calculator, and assuming you qualified for a 30-year loan at an interest rate of 3.00%, you could theoretically get approved to buy a home valued at about $626,000 if you made a 20% down payment. Here's what that would look like:
- You'd borrow $500,800 after making a $125,200 down payment
- Your monthly principal and interest costs would total $2,111.39
- Your insurance would cost $219.08 and taxes would add up to $526.92 per month
- Total payments would be $2,857.39, which would give you a debt-to-income ratio of 49.9%
Remember, though, spending 50% of your monthly income on housing costs is well above what most experts suggest is a safe amount. And chances are good that you'll have other debts to factor into your DTI as well. In addition, you may not be able to save up a down payment of $125,200. As a result, it's likely the actual amount you'd be able to borrow would be quite a bit lower.
Your mortgage with $1,000 in monthly debt payments
If you have $1,000 in other debt payments, for example, that would reduce the amount you could afford for your monthly housing costs to just $1,862.62 per month. And say you couldn't come up with a full 20% down payment and opted to put down just 10% instead. In this scenario, the most expensive home you'd be able to afford goes all the way down to $334,500. And here's what that would look like:
- You'd borrow $301,050.00
- You'd make a down payment of $33,450
- Your monthly principal and interest costs would total $1,269.24
- Your insurance would cost $117.08 and taxes $281.50
- You'd owe private mortgage insurance (PMI) of $195.12 per month because your down payment would be under 20%.
- Total monthly payments would be $1,862.94 which would give you around a 50% debt-to-income ratio.
So how much can you afford?
As you can see, your income plays a big role in determining how much house you can buy, but your debt and the size of your down payment matter too. If you have a specific price range in mind that seems out-of-budget at first, boosting your down payment and paying down other loans could potentially make all the difference in the amount of home you're able to purchase.
Of course, you'll always want to ensure you don't take on a larger mortgage than you feel comfortable paying. Homeownership has plenty of costs beyond just your mortgage, taxes, and insurance -- including maintenance and repairs. And having an emergency fund is more important than ever as a homeowner, since you don't want to risk becoming unable to pay your mortgage loan.
So be sure to consider all your financial goals when deciding what size mortgage payment is right for you. And don't assume that just because a lender says you can afford a loan of a certain size that it's a good idea to take out such a large one, as you need to make sure payments are comfortable for you over the long-term.
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