You currently earn a handsome $120,000 annually, but you’ve always wanted a house of your own. However, there are other considerations that come into play in addition to your salary when determining how much house you can actually afford. Let’s dive in and break it down.
The 28/36 Rule: Your Guide to Affordability
The 28/36 rule is a widely used guideline for determining how much house you can comfortably afford It suggests that:
- 28% of your gross monthly income should go towards housing expenses (mortgage payments, property taxes, insurance, etc.).
- 36% of your gross monthly income should cover all your debt obligations (including housing expenses, car loans, student loans, credit card payments, etc.).
Let’s Crunch Some Numbers
With a $120,000 salary, your monthly income is $10,000. Applying the 28/36 rule, we get:
- Maximum monthly housing expense: $2,800
- Maximum total debt obligation: $3,600
Example: Can You Afford a $350,000 House?
Let’s say you’ve found a beautiful house listed at $350000. After crunching the numbers, you find that your monthly mortgage payment would be $1800. You also have other monthly debts totaling $1,100.
Adding these up, your total debt obligation comes to $2,900, which is well within the 36% limit. This means you can comfortably afford this house based on your income and current debt.
But Wait, There’s More!
Although the 28/36 rule is a useful place to start, there are other factors to take into account. Here are some other things to keep in mind:
- Location: Housing costs vary greatly depending on where you live. A $350,000 house in a rural area might be a mansion, while the same amount could buy you a tiny apartment in a major city.
- Loan Term: A shorter loan term means higher monthly payments but lower interest costs overall. A longer loan term means lower monthly payments but higher interest costs in the long run.
- Interest Rate: A lower interest rate means lower monthly payments and less interest paid over the life of the loan.
- Credit Score: A higher credit score can qualify you for a lower interest rate, saving you money on your monthly payments.
- Down Payment: A larger down payment means lower monthly payments and less interest paid over the life of the loan.
Get Expert Advice
Speaking with a mortgage specialist is always a good idea because purchasing a home is a big decision. They can assist you in analyzing your financial status, looking into various loan options, and figuring out what price range will best suit your requirements.
Remember, the 28/36 rule is just a guideline. Ultimately, the amount of house you can afford depends on your individual circumstances and financial goals.
How Much House Can I Afford with a 120k Salary
According to the Federal Reserve Bank of St. Louis, the median home sales price in the US is $436,800. However, as we’ll see below, depending on a number of situation-specific factors, your home’s affordability could range from $265k to nearly $400k, even if you make $120,000 annually and can afford a $15k down payment. Your income and down payment amount are just two factors that affect how affordable your home can be; other factors include your location, current debts, market rates, financial objectives, and more. Try our comprehensive homebuying service if you want to get right to the point. It will assess your circumstances automatically and provide you with detailed, individualized guidance on increasing your purchasing power. You can also try our free-to-use home-affordability calculator. If you want to learn the ins-and-outs of home affordability, keep reading.
Let’s walk through a couple examples. In both cases, we’ll assume that our prospective buyer makes $120,000 a year, has $15,000 in savings, a good credit score (700–739), and pays $1,500 a month for their current debt (auto, student, and credit card).
The first homebuyer is shopping for a home in Austin, TX. The second is shopping for a home in Boston, MA.
How much House Can You Afford with a 120k Salary in Austin, TX
How much House Can You Afford with a 120k Salary in Boston, MA
Recall that these are only estimates, and your ability to purchase a home with a salary of $120,000 is dependent on a number of factors besides your monthly income. Two major ones are the amount of money you currently save each month and the amount of debt you currently have to pay off. Having the proper information and resources is essential to maximizing the affordability of your house, and that is what we are here to help with. Our calculators take care of the hard work for you.
In order to better understand how our “how much house can I afford” calculator can assist you in navigating the home-buying process, let’s take a closer look at its internal workings.
How Much House Can You ACTUALLY Afford (Based On Salary)
FAQ
How much of a house can I afford if I make 120K a year?
How much can I spend on a house if I make 125k a year?
Can I afford a 500k house on 120K salary?
Is 120K enough for a house?
How much house can you Afford on a salary?
So, assuming you have enough to cover that down payment plus more left over for upkeep and emergencies — and also assuming your other monthly debts don’t take you over that 36 percent figure — you should be able to afford a home of $470,000 on your salary. How much house can you afford?
Can a $125,000 salary afford a house?
While a $125,000 salary might afford you a sprawling estate in some locales, it won’t get you much in, say, Silicon Valley or the Hamptons. As you determine how much house you can afford, compare that against your local real estate market to make sure your budget aligns with actual home prices.
How do you calculate how much house you can afford?
To calculate how much house you can afford, we take into account a few primary items, such as your household income, monthly debts (for example, car loan and student loan payments) and the amount of savings available for a down payment. As a home buyer, you’ll want to have a certain level of comfort in understanding your monthly mortgage payments.
How much should you pay for a home?
When determining what home price you can afford, a guideline that’s useful to follow is the 36% rule. Your total monthly debt payments (student loans, credit card, car note and more), as well as your projected mortgage, homeowners insurance and property taxes, should never add up to more than 36% of your gross income (i.e. your pre-tax income).