I Make $100K a Year. How Much House Can I Afford?

Buying a home represents a significant financial commitment, and a common question for many aspiring homeowners is how much house they can realistically afford. Understanding this figure extends beyond simply knowing your annual income; it involves a detailed examination of various financial components that lenders consider. This article outlines key factors and calculations to help you understand your personal home affordability.

Key Factors Influencing Affordability

Lenders assess several financial aspects to determine the mortgage amount you qualify for. Your gross income, total earnings before deductions, forms the foundation. Lenders verify this income through pay stubs and tax returns.

Existing debts are another consideration, as they reduce income available for housing. Lenders examine monthly obligations like credit cards, student loans, and auto loans. The size of these debts influences your borrowing capacity.

Your credit score also plays a role, reflecting your financial management history. A higher score indicates lower risk, leading to more favorable mortgage interest rates. A lower score may result in higher rates, increasing monthly payments and affecting affordability.

Your down payment directly impacts the loan amount and loan-to-value (LTV) ratio. A larger down payment reduces the principal borrowed, leading to lower monthly payments and potentially eliminating private mortgage insurance.

Current market interest rates also influence your monthly mortgage payment. These rates determine the cost of borrowing money over the loan’s term.

Calculating Your Affordability

Lenders use debt-to-income (DTI) ratios to gauge your mortgage capacity. This compares total monthly debt payments to gross monthly income. Two main DTI ratios are used: the front-end ratio (housing costs) and the back-end ratio (all monthly debts).

For conventional loans, lenders prefer a front-end ratio not exceeding 28% of gross monthly income and a back-end ratio below 36%. Some conventional loans may allow a back-end DTI up to 45%, while government-backed loans, like FHA, can allow up to 50%.

For an individual earning $100,000 annually ($8,333 monthly), a 36% back-end DTI limit means total monthly debt payments, including housing, should not exceed $3,000 ($8,333 x 0.36). If existing debt payments are $500 per month, the maximum allowable monthly housing payment is $2,500.

This $2,500 must cover principal, interest, property taxes, and homeowner’s insurance.

The down payment impacts the loan amount and monthly principal and interest. A larger down payment reduces the loan principal, lowering the monthly payment. For example, on a $300,000 home, a 20% down payment ($60,000) means borrowing $240,000, versus $285,000 with a 5% down payment ($15,000).

Current interest rates also influence this calculation. A higher interest rate on the same loan amount means a greater portion of the monthly payment goes towards interest.

Beyond the Mortgage Payment

Beyond the principal and interest payment, several other recurring costs contribute to homeownership. Property taxes are a local government levy, calculated by multiplying the property’s assessed value by a tax rate. They vary by location and are typically paid monthly as part of your mortgage escrow.

Homeowner’s insurance protects your property against damage. Average costs in the U.S. are approximately $2,110 to $2,397 annually for $300,000 of dwelling coverage, varying by location and coverage. This premium is often included in your monthly mortgage payment.

Private Mortgage Insurance (PMI) is required for conventional loans with less than a 20% down payment. PMI protects the lender if you default and costs between 0.2% and 2% of the original loan amount per year, or $30 to $70 per $100,000 borrowed.

You can request its cancellation once you build 20% equity.

Homeowners Association (HOA) fees are costs for properties within HOA-governed communities, common in condominiums, townhouses, and some single-family homes. These fees cover common area maintenance and amenities, with average monthly costs from $170 to $293, though they can be higher.

Closing costs are one-time expenses paid at purchase culmination, typically ranging from 2% to 5% of the home’s price. These include fees like loan origination, appraisal, and title insurance. Additionally, budget 1% to 4% of the home’s value annually for ongoing maintenance and utility expenses.

The Pre-Approval Process

After understanding homeownership costs, the next step is lender pre-approval. Pre-approval is a formal assessment by a lender of how much they will lend, providing a figure for your home search. This indicates to sellers that you are a serious, qualified buyer.

To initiate pre-approval, lenders require documents to verify your financial standing. You need to provide recent pay stubs, W-2 forms, and tax returns from the past two years to confirm income.

Bank statements from the past two to three months are necessary to show proof of funds for a down payment and reserves.

Lenders request statements for all existing debts, including credit cards, student loans, and auto loans, to calculate your debt-to-income ratio. Provide identification, such as a government-issued ID and your Social Security card.

The lender will perform a credit check, reviewing your credit history and score. After review, the lender issues a pre-approval letter stating the maximum loan amount, expected interest rate, and validity period.