How Much House Can I Afford with a $120K Salary?

I make $120,000 a year: How much house can I afford?

Before buying a home, you’ll need to know how much you can afford.

Your income is closely linked to the size and type of mortgage for which you qualify. And while income is a key factor, the mortgage amount you’ll qualify for is determined by several other variables, including your credit score, your debt, and current mortgage rates.

This article will explore the range of home prices you can target, how different factors influence loan amounts, and strategies to increase your home buying power.

In this article (Skip to...)

• What mortgage can I afford if I make $120K?
• $120K income mortgage payment breakdown
• Max home purchase price by down payment
• Max home purchase price by mortgage rate
• Max home purchase price by debt-to-income ratio
• Strategies to increase home buying power

If I make $120,000 a year, what mortgage can I afford?

If your annual income is $120,000, you should be able to afford a house between $373,000 and $633,000.

Why the sizeable difference? Because lenders look at more than just your income when approving you for a mortgage.

Two different homebuyers earning the same annual income of $120K could have completely different qualifying scenarios.

Here are some of the factors that influence how much you can borrow.

• Credit Score. A higher credit score can secure a lower interest rate and better loan terms, while a lower score can limit your loan options.
• Down Payment. A larger down payment reduces your mortgage loan amount and monthly payments.
• Debt Ratios. Your debt-to-income ratio (DTI) impacts your borrowing capacity. Having a lower debt ratio means you may qualify for a higher-priced home.
• Interest Rate. The interest rate on your mortgage significantly affects your monthly payment and overall affordability.

Other factors mortgage lenders consider are employment history, savings, and the type of loan.

$120K income mortgage payment breakdown

Generally, lenders who follow the 28/36 rule will allow 28% of your income to go towards your housing costs.

As an example, $120,000 annually equals $10,000 per month. $10,000 x .28 = $2,800 (your ceiling for monthly housing expenses).

If you bought a home for $380,000 and made a down payment of 5%, your loan amount would be $361,000. Using a mortgage loan amount of $361K with a mortgage of 7%, your monthly principal and interest rate payment would be approximately $2,400.

But your monthly housing expense includes more than just principal and interest. Other items include:

Private Mortgage Insurance (PMI): Required on all FHA loans, and on conventional loans if your down payment is less than 20%.

Taxes: Most homeowners choose to have their property taxes paid from an escrow account attached to their monthly mortgage payments.

Homeowner's Insurance: Mortgage lenders require homeowner’s insurance to cover your property. This insurance is typically paid from an escrow account and is meant to protect you, your lender, and your home from damage and liability.

Homeowner’s Association Dues: If you’re buying a home with HOA fees, they aren’t typically included in your monthly mortgage payment. Regardless, mortgage lenders will include HOA or condo fees in your monthly housing expense.

If we estimate $400 per month for these additional costs, we arrive at our qualifying payment of $2,800 per month.

Maximum home purchase price by down payment

The amount of your down payment impacts your loan amount, as well as your monthly payments.

Here’s an example of how an annual income of $120,000 with different down payment amounts correspond with how much home you may qualify for.

*Payments include an estimated monthly escrow payment of $400 and an interest rate of 7%. Home prices rounded to nearest $100.

Maximum home purchase price by mortgage rate

Interest rates can significantly affect your maximum home price. When rates drop, it can be an opportune time to buy.

Here are a few examples using an income of $120,000 with varying mortgage interest rates and their impact on how much home you can afford to buy.

* Payments include an estimated monthly escrow payment of $400. Home prices rounded to nearest $100 and assume a down payment of 5%.

Maximum home purchase price by debt-to-income ratio

Debt-to-income ratio (DTI) measures your monthly debt payments against your gross monthly income. A lower DTI improves your loan eligibility and increases how much home you can buy.

While the general rule of 28% is often used when calculating your housing ratio, many lenders will go up to 40%, some even higher.

Here’s an example of how much home you may be able to afford based on different debt ratios:

* Payments include an estimated monthly escrow payment of $400. Home prices rounded to nearest $100 and assume a down payment of 5%.

Important debt ratio consideration

When it comes to your debt-to-income ratio, it’s important to remember that lenders look at more than the ratio related to your just housing expense.

Your total housing expenses are part of what’s known as your “front-end” ratio. Another crucial aspect that lenders consider is your “back-end” ratio.

Your back-end ratio is important because it factors in other existing debts you pay monthly. Debts such as auto payments, credit card payments and student loans can make a significant difference in how much you can borrow.

Most lenders require a maximum back-end ratio ranging from 36% to 50% of your monthly income.

Strategies to increase home buying power

Fortunately, there are a number of ways to boost your purchasing power despite today’s challenging housing market:

Reduce your debt ratios

Paying down some of your debt can mean increased affordability. Lowering your debt-to-income ratio by paying off credit card debt or car payments can help you qualify for more home. Even a $200 or $300 reduction in monthly obligations can significantly increase your price range.

Boost your credit score

Generally, the higher your credit score, the better your interest rate. A lower interest rate means a lower payment, increasing your buying power.

There are multiple strategies to raise your credit score fast. Start by reviewing your credit reports from the three major bureaus—Experian, TransUnion, and Equifax—for any errors. If you find inaccuracies, you can file a dispute with the credit agencies, which are legally obligated to correct them promptly.

If your credit report is accurate, focus on settling any collections accounts, consistently paying your outstanding debts on time each month, and, if possible, reducing your overall credit card debt to a CUR (credit utilization ratio) to a level of 30% or lower.

Consider an FHA loan

FHA loans are backed by the Federal Housing Administration, providing insurance to lenders. This insurance ensures that banks receive payment even if you default on your mortgage, making them more lenient with credit and debt-to-income ratio requirements.

To qualify for an FHA loan, you must plan to use the house as your primary residence and move in within two months after closing.

Increase your down payment

A higher down payment means a lower loan amount. The less you’re borrowing, the lower your monthly payment, allowing you to qualify for more home.

When you don’t have the means for additional down payment funds, consider getting gift funds from a relative. Doing so could lower your loan amount and get you into a higher price range.

The bottom line

Whether you’re a first-time homebuyer or a move-up buyer, knowing how much to budget for your ideal home is essential, as it guides the entire home buying process. Use a home affordability calculator to establish a realistic budget and explore mortgage options from various lenders.