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I Make $40,000 a Year. How Large a House Can I Afford?

Reviewed by: David Naimey

Approved by: Chad Turner

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You will assess how large and expensive a house you can afford depending on how much you make. The price of a home you can realistically afford depends on your income, the down payment, and your other financial obligations. If you are already paying a student loan or a car loan, you have less money available to repay a mortgage. That means you should aim at a smaller, cheaper home. 

Let’s go through a helpful guideline on how high a house loan you can afford.

What Determines Your Monthly Mortgage Payment? 

Interest rates based on your credit score and the down payment will determine how much you will have to pay for your mortgage. 

A good credit score of approximately 620 or below it’s a good starting point. With a down payment of 20% or more, you can avoid PMI (private mortgage homeowner’s insurance) and lower your mortgage monthly payment. 

Other factors include your salary, your debt-to-income (DTI) ratio, and more.

Your salary 

The most important determinant to see if you can afford to purchase a home is to calculate how much is your annual income. 

Your gross income (pre-tax) is essential in determining your debt-to-income ratio. However, for the purposes of this calculation, you should evaluate your monthly net income after taxes. 

If you share your living space with another adult over 18, you can factor in your combined household income. With two salaries, you can split your total debt and afford a bigger, more expensive home value in a better area.

To determine how expensive a house you can truly afford, start by focusing on the money that lands in your bank account each month. This step helps you stay within your budget without overextending yourself. 

Once you have this figure, you can use a loan payment calculator to count your precise existing debt payment terms, including child support, student loans, car loans, and credit card payments. Exclude your current rent from your debt if you’re currently renting an apartment because your rent payment will stop when you become a homeowner.

The level of your salary streamlines the amount of money you spend every month on your monthly debts. It helps you figure out precisely the mortgage amount that fits your budget. It also provides you with the right moment to assess your down payment options.

Defining a Suitable Down Payment

Once you start exploring your real estate options, it’s time to assess your down payment home affordability. The larger the down payment, the smaller the monthly mortgage payments for the property. 

With a down payment of 20%, you eliminate the need for private mortgage insurance and reduce monthly payments significantly. That’s why the industry standard often suggests a 20% down payment for conventional loan programs — but there are options for lower down payments.  

While 20% is the typical benchmark for property tax, you have the flexibility to contribute more. In fact, a larger down payment, such as 40%, can significantly affect the affordability of your mortgage in the long run. Although this option doesn’t suit everyone, it can help keep your monthly mortgage payments manageable.

Quick Calculation for Down Payment

Here’s a straightforward example to determine your down payment:

  • You intend to make a 20% down payment on a $250,000 house.
  • Multiply the home’s price ($250,000) by 20% (0.20).
  • $250,000 x 0.20 = $50,000.
  • So, you’d need a $50,000 down payment for a $250,000 house.

Consider that a 40% down payment would amount to $100,000 for the same $250,000 house. If a substantial down payment doesn’t align with your financial situation, consider waiting until you can afford a 20% down payment or explore loan programs with lower down payment requirements.

Such calculations are easier with our loan calculator. Use it to see just how far your finances can stretch and make informed decisions for a brighter financial future.

Striving for a Healthy Debt-to-Income (DTI) Ratio

The debt-to-income (DTI) ratio tells you how much money is left after you have paid debts, credit cards, student loans, child support where applicable — and your mortgage payment. The lower the DTI ratio, the better it is for your household. 

Debt-to-income ratio is important because it gives you financial wriggle room for mortgage rates in case of an emergency such as your car breaking down, a health emergency, or an urgent home repair. 

For instance, if you have a gross monthly income of $2,500 and total monthly debt payments of $1,300, your DTI ratio is 52%. This is relatively high, and many home loan programs, including USDA and FHA, may not lend to borrowers with such a ratio. Most lenders will advise you to have a DTI of 43% and below — and, ideally, around 30%. 

In the above example, to meet the recommended 30% DTI ratio you’d need to pay off all credit card debt and your car loan, leaving only a $1,000 monthly rent payment. If 30% of your $2,500 gross income is $750, then your mortgage payment should not exceed $750 per month.

Using a Mortgage Calculator

Now that you’ve determined your budget, use a mortgage affordability calculator to find out how much house you can comfortably afford while still saving a significant portion of your income. 

Remember that your down payment plays a crucial role in reducing your monthly payments. For instance, with a $250,000 home and a 30-year loan at a 4.5% interest rate, you can achieve a $750 monthly mortgage payment by making a 41% down payment of $102,000.

How Much Can I Afford to Pay in Mortgage?

There are many mortgage options once you have decided you are ready to buy a home. If a conventional loan has unaffordable requirements, then you could check whether you apply for a USDA mortgage loan or an FHA purchase loan. These types of mortgages have more lenient requirements, lower down payments, and lower interest rates. 

We encourage you to use mortgage calculators to check how much home you can afford on your current salary, alongside the level of down payment and the current interest rates. These will impact your monthly mortgage payments and give you a clear picture of your home-buying possibilities.

Before wrapping up, remember the power of numbers. Use our compound interest calculator to see how they can multiply your annual returns. If your payment is less than expected, consult with a lender. 

Ready to buy a house? Our mortgage payment calculators will help you estimate how much you can afford to pay each month and get a clear financial picture, including total taxes and insurance. Contact a mortgage loan officer and start your homeownership journey today!

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