Before you prequalify or start touring houses with your real estate agent, the first step to starting your journey to homeownership is finding out how much house you can afford comfortably. 

The average home buyer in 2024 had a median income of $108,800 but that doesn’t mean if you make less, you won’t be able to buy a home. In truth, income is just one factor that contributes to your ability to qualify to borrow with a mortgage lender. 

How Much Can I Borrow For a Mortgage Based On My Income?

To understand how much you can borrow based on your salary, you have to think like a mortgage lender. And they’re paying attention to more than what’s on your paycheck.

Lenders use a specific formula to decide what each potential homebuyer’s borrowing propensity is for a home loan. This isn’t a formula that they’ll be sharing with the public though. It varies from bank to bank and is used to get the interest rate you’ll be paying on your mortgage. 

This formula includes your debt-to-income ratio, where your credit score stands, and how much of a down payment you’re planning to use. So you may need to use a mortgage calculator to have a better idea of how much house you can afford. 

First, let’s take a look at how each of these factors affects your odds for approval: 

• Downpayment: Depending on the type of loan you get, you should be prepared to put down up to a 20% downpayment. For options like an FHA loan, this can actually be closer to 3% instead. 

The higher the down payment, the less you’ll have to finance. A downpayment of 20% or more waives the requirement of paying Private Mortgage Insurance (PMI).

• Credit Score: Credit scores basically determine how much risk you pose to a lender. They assign your interest rate based on that level of risk associated with your score. The lower your credit score, the higher the APR.

• Debt to Income Ratio: Your DTI ratio is all your outstanding monthly debt payments divided by your gross income. This includes student loan payments, credit card debt, personal loans—pretty much anything with an APR attached to it. 

The maximum mortgage you get approved for will depend on how your financial picture lines up with each of these components. Using a mortgage borrowing calculator can help you pin down a comfortable mortgage payment and plan out your expenses based on your monthly income.

How Much Times Your Salary Can You Borrow For a Mortgage?

If you don’t have much debt in your credit profile, you’ll likely get approved to borrow much more than someone with a significant amount of debt. 

To a mortgage lender, extra debt obligations have the potential to prevent you from repaying your mortgage if your income is affected in the future. 

In 2024, mortgage rates have risen significantly compared to previous years. As of January 2, 2024, the average 30-year fixed mortgage rate was approximately 6.91%. 

Borrower With High Debt	Borrower With Low Debt
Down Payment	$15,000
Annual Income	$75,000
Mortgage Rate	6.91%
Credit Score	719 (Good)
Monthly Debt Payments	$1,600
Debt-to-Income Ratio	25.6%
Maximum Home Purchase Budget	$180,000

With minimal debt, you can end up borrowing about six to seven times your annual income when you get qualified for a home purchase. Compared to a maximum home purchase of about three times your salary, when debt accounts for 25% of your monthly income. 

In the example, the $15,000 down payment is only about 3% of the maximum purchase price. This means you’ll be adding Private Mortgage Insurance (PMI) to your monthly payments, which cuts into how much you can afford. A solution would be to make a larger down payment.

How Much Income Do You Need For a $400,000 Mortgage?

While the $75,000 annual income qualifies our borrower from earlier for a home that’s well above $400,000, it doesn’t leave much wiggle room for life to happen. Need to make repairs as soon as you move in or buy furniture that fits the new space? You might be in a bind. 

While you might get approved for more than you can afford, that doesn’t mean you have to shop for a home with the maximum amount in mind. As a rule of thumb, an affordable mortgage is 2 to 2.5 times your gross income. 

If we reverse engineer that rule to afford a $400,000 home you would need to be bringing in an annual gross income of at least $160,000. This is just a guideline, and you could still qualify for the $400,000 house even if you’re not making $160,000 a year. 

On the flip side, you might not qualify for the home at that salary if your credit score and debt to income ratio aren’t the best. So it’s important to keep all of the factors that contribute to your loan amount in mind—not just your income. 

Lenders grant the best mortgage rates to those with healthy credit scores. To learn more about what that looks like, check out the article, Mortgage Rates by Credit Score.

For figures related to your personal financial situation on affording that caliber of home, you can use a home affordability calculator to plug in the numbers and set reasonable goals for yourself. 

What Factors Do Mortgage Lenders Use When Deciding How Much You Qualify For?

Your lender calculates to help them predict your ability to repay a mortgage over 30 years. So, they have to include multiple factors to ensure they’re making the right choice by lending to you. 

Those factors include:

• Gross income
• Credit score
• Current assets
• Property type
• Employment history
• Debt ratios

All of that information allows them to get a full view of your financial situation and ends with an approval or denial of your mortgage application. 

The requirements for some of these factors vary depending on the loan program you’re under. For example, A veteran with a VA loan will have lower requirements around credit score and income than someone with a conventional loan. 

Gross Income

Your gross monthly income is what lenders use to determine how much house you can qualify for, but it’s not the amount you take home. It includes any bonus income you receive, as well as any rental income you’ve been receiving for at least a year. 

Several other sources can be included in your gross income as well:

• Alimony
• Child support
• Self-employment income
• Social security
• Disability
• Part-time earnings

This doesn’t account for your state and federal taxes, health insurance, life insurance premiums, retirement contributions, and other pre-tax expenses. So, you’ll want to keep that in mind as you determine what’s within your budget. 

Credit Score

Creditworthiness doesn’t just affect how much you get approved for, it also impacts the interest rate you’ll be paying for the next 15 or 30 years of your loan term. Your credit score at the time you apply for your mortgage loan can have a huge impact on your future. 

Don’t let a poor credit score cost you tons of money in interest. If you’re struggling to bring your credit score up before prequalifying for a home loan, CreditStrong’s easy-to-use credit-building tools boost your score in record time. Find out what pricing plans work for you. 

The higher your credit score, the lower your interest rate will be. And it’s more likely you’ll be approved for a larger loan amount. You can make improvements to your score by focusing on your payment history, and opening accounts that build credit. 

One account that works extremely well to build credit is the credit builder loan. Within just nine months, the average credit builder account holder saw an increase of 40 points. What would you be able to qualify for with an extra 40 points on your score? 

Assets

Having funds saved up for a home purchase is important. But It’s not just about what’s in your savings account. It’s anything valuable you own. This can be— 

• 401k or retirement accounts 
• Stocks, bonds, and certificates of deposit 
• Checking and savings accounts

When applying for a mortgage, your loan officer requests statements to prove your available assets. You’ll be writing the check for a down payment, an earnest money deposit, inspection fees, and closing costs.

But paying those costs shouldn’t leave you high and dry. 

You still want to have a reserve of three to six months’ worth of monthly expenses in case your income is compromised in any way. With the uncertainty of a pandemic, some experts have suggested having six months to a year of savings. 

Property Type

A primary residence is the easiest type of property to get approved for since there’s less risk from the mortgage lender’s perspective. Secondary or investment properties face higher interest rates, income, and credit score requirements.

If you’re no longer able to afford a lavish lifestyle, the vacation home or investment property is likely the first monthly expense to get cut. The fact is people prioritize payments on the homes they live in primarily. 

Based on the property type, you’ll also be excluded from certain loan programs. FHA, USDA, and VA loans only provide financing for primary residences. 

Employment

Most conventional and government-backed loans require at least two years of consistent work history which gets verified through your employer and W-2s. 

If nine to five isn’t your deal, they’ll also accept two years’ worth of self-employment history. Of course, you’ll have to provide a bit more documentation in the form of tax returns, and business accounting documents for the current year. 

Similar to your length of credit history, your employment history gives lenders peace of mind that you can maintain the monthly mortgage payment or at least have the ability to find comparable work if your current position doesn’t pan out. 

Debt-to-Income Ratio

To make sure you’re not overextending yourself by taking on a large debt such as a monthly mortgage your debt-to-income ratio (DTI) has to be low enough to handle the extra responsibility. 

You have two debt ratios to be mindful of when considering a mortgage: a front-end ratio and a back-end ratio. 

Your front-end debt ratio just works with your home’s monthly payment. Mortgage lenders prefer that your ratio doesn’t exceed 36% with the inclusion of interest, property taxes, mortgage insurance, and the principal. 

The back-end ratio takes everything else into account. It’s all of your monthly debt payments in addition to your new mortgage payment. Your back-end ratio will be higher than the front end with most lenders accepting a ratio of 41%-50%. 

Additional Costs to Consider When Thinking About Buying a House

When you purchase a home, you’re not just responsible for the monthly mortgage payment. After you let go of the initial chunk of change for your down payment and closing costs, there’s another round of costs to consider as you get settled into your new place. 

• Property Taxes
• Maintenance
• Home Owners Association (HOA) fees
• Utilities
• Home Owners’ Insurance

These added costs can catch you off guard if you’re not prepared, so you should include these housing expenses in your budget as you calculate your mortgage affordability. 

This mortgage calculator from Bankrate.com can come in handy when looking to include HOA fees, taxes, and insurance as well as any debt payments. 

There are even housing costs you won’t be able to avoid after you pay off your home!

Property Taxes

If there’s one thing you can be sure of, it’s that Uncle Sam will get his money. Even after you pay the house off, you’ll still be paying property taxes on the home and so will anyone who inherits your house. 

Typically, the mortgage company will include your property taxes in escrow as part of your monthly mortgage payment and pay them on your behalf. The only way this doesn’t happen is if you opt-out of doing that at closing which isn’t recommended. 

Depending on the county you reside in, property taxes can vary and may raise or lower depending on your home’s assessed value. 

According to Forbes, nationwide property taxes range from 0.26% to 2.08%. You can include those specific rates to get a more accurate monthly payment result when using a mortgage borrowing calculator. 

Home Insurance

Natural disasters and emergencies can happen to anyone. So it’s better to be safe than sorry and invest in home owner’s insurance to protect your home and valuables in case of an unfortunate event. 

In most cases, your lender will require proof of home owner’s insurance before you get to closing. You can shop around for the best rates with the zip code and county that you’re looking for a home in. 

Your insurance premium can be higher in places with higher crime rates or areas with frequent natural disasters. But, you could catch a break if you’re near public services like police departments or fire stations. 

Maintenance

Even houses that still have that new house smell will need to have repairs and maintenance done eventually. With an older home, you’ll want to have cash available if there are any urgent repairs discovered during the inspection that aren’t taken care of by the previous homeowner. 

This is one cost you’re not going to be able to escape. The older your home gets, the more repairs and upkeep it will require. And some of those repairs can be a drain on your wallet. It’s wise to put away at least 1% to 4% of your income annually for household maintenance. 

Utilities

Utilities are going to vary from month to month based on usage, the same way it does if you’re living in an apartment. But if you’re going from a smaller space to a much larger one, it’ll take more to heat and cool the home and you may have a higher electric bill as well. 

If you’re looking to move to a specific area, it can be a great idea to talk to your future neighbors to get an estimate of how much to budget for bills like gas, water, electricity, and trash. 

Association Fees

HOA fees are fairly consistent and average $200 to $300 monthly according to the National Association of Realtors. 

You don’t usually see your HOA fee go down though. It’ll likely keep going up or remain where it is since it’s for the upkeep of the community and the amenities that you can access as a homeowner in that development. 

The first HOA fee is usually included as part of your closing costs, so you shouldn’t have to worry about the first month’s fee.

Conclusion

Buying a home requires more than a high income to get the place you want. You’ll have to pay attention to your credit profile as a whole and make improvements to your credit score and DTI to get the best mortgage rates. 

Use the mortgage calculators at your disposal to estimate what purchase price works best for your budget and be mindful of the added costs you’ll be paying at closing and every month.

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