How Much Income Do You Need to Buy a House?

While the factors that go into buying a home vary greatly by your personal situation, your location and the current housing market, you likely still want to prepare your finances for this big investment. Many homebuyers start with their monthly income. 

Learn about how you can determine your buying budget, how much of your income should go towards this debt and the expenses you need to keep in mind as you’re shopping around for your dream home.

Determining Your Budget

Oftentimes, your lender or a financial advisor can help you determine how much home you can afford. However, there are some guidelines and expenses you should take into consideration to fully understand the scope of these costs. 

The 28/36 Percent Rule

One guideline that many financial institutions and advisors use is the 28/36 rule in which you should spend no more than 28 percent of your gross monthly income on housing costs and no more than 36 percent on your overall debt, which includes those housing costs.  

For example, if you make $5,000 a month pre-tax, your monthly housing costs shouldn’t be more than $1,400. You can get this number by multiplying $5,000 by 0.28 (or 28%). 

Further, if you have an additional $400 in monthly debt, your overall monthly debt would be $1,800. If you divide this number by $5,000, you would get 0.36 or 36 percent.  

It’s important to keep in mind that this isn’t a hard and fast rule. It all depends on what you’re comfortable with, your own situation and how this debt could affect other aspects of your life. However, it’s a solid starting point to help you figure out what you can realistically afford.

Homebuying Expenses

As you’re going through this process, it’s important to know how much you should set aside for the actual process of buying a home. Here’s what you should prepare for: 

• Down payment: many homebuyers pay up to 20 percent of the property’s purchase price. 

• Closing costs: this includes application fees, origination fees, credit fees, underwriting fees, appraisals, home inspection, title fees and more. You’ll likely want to get a full detailed list of closing costs from your lender. 

• Moving costs: take into account moving supplies, renting a van or hiring moving professionals. 
• Reserves: lenders often require proof of additional savings so that they know you’re not depleting all your money and can make your monthly payments even if there was a decrease in household income or you were to suddenly lose your job.

Ongoing Expenses

After you close on your mortgage and move into your home, you should be prepared and cognizant of any ongoing costs. This includes: 

• Housing costs: these can include monthly mortgage payment, mortgage insurance, property taxes, homeowners and hazard insurance and homeowners association or condo fees if applicable. 

• Utilities: this can include gas, electricity, water, internet, cable and waste management. 

• General home maintenance fees: once you’re a homeowner, you’re responsible for everything on your property. This includes any non-urgent maintenance your home requires, such as replacing vent filters, upgrading your kitchen or repairing an old roof. 

• Emergency fund: you should expect the unexpected and keep some money aside for emergencies such as a pipe burst, dying appliances or heating, ventilation and cooling repair.

What Factors to Keep in Mind

There are many variables that can affect homebuying and affordability. Here are some of the most important: 

Your Current Debt

As you’re shopping for a home, consider what your current financial obligations are and how those monthly payments will affect how much you can afford on your mortgage. In addition, lenders typically consider your debt-to-income (DTI) ratio when qualifying you for a mortgage and how much you can borrow. DTI compares your monthly debt to your gross monthly income. Essentially, the higher your DTI, the more of a risk you are to lenders. If it’s too high, you may not be approved for a mortgage. 

Your Credit Score and History

Your credit score helps lenders determine the interest rate you can secure. Simply put, your credit score and history show how likely you are to pay back your debt, and a higher credit score can help you get a more favorable interest rate. It’s important to check your own credit score before you decide to buy a home to determine if you should or could try to improve it. 

Where You Want to Live

The location of the home you want to buy is also a main factor in determining affordability. Properties in more populated cities with amenities close by are likely to cost more than a home in the suburbs. Different states have different costs of living as well.

The Type of Loan You Get

Different loans have different requirements, guidelines and qualifying factors. For example, a Federal Housing Administration (FHA) loan may have requirements that allow a wider range of homebuyers to secure a loan, but they’ll have to pay the FHA mortgage insurance. Some loans don’t require a down payment or mortgage insurance but are exclusively for borrowers that meet certain criteria. 

How Much You Put Down

The larger the down payment, the less you’ll need to borrow. This would also reduce your loan-to-value (LTV) ratio or how much your borrowing compared to the property’s purchase price. The LTV would also affect how much money you’d be able to borrow and the interest rate you can secure. 

The Interest Rate You Obtain

Your interest rate is dependent on current market conditions, your credit score, income, debt and down payment. A lower interest rate would help to decrease your monthly mortgage payment, which is why many borrowers take the time to shop for a favorable interest rate.

Shop Smart

While we can’t tell you the exact income you need to buy a home, there are specific factors you need to take into consideration as you’re shopping around. Many variables can affect your homebuying ability and the mortgage you get. It’s important to be cognizant of your current debts, how a mortgage will affect your finances and all the costs of being a homeowner.  

This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.