Curve

If I make $50K a year, how much house can I afford?

Michele Lerner
The Mortgage Reports contributor

Your home buying budget may be bigger than you think

It’s definitely possible to buy a house on $50K a year.

For many, low-down-payment loans and down payment assistance programs are making home ownership more accessible than ever.

But everyone’s home buying budget is different. 

The amount you can afford doesn’t just depend on your salary, but on your mortgage rate, down payment, and more. 

Depending on these factors, you might afford a house from $180,000 to nearly $300,000 on a $50K salary. 

You have to figure out what you’re eligible for to know the real number.

Verify your home buying eligibility (Aug 6th, 2020)

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If I make $50K a year, how much house can I afford? 

A person who makes $50,000 a year might afford a house worth anywhere from $180,000 to nearly $300,000. That’s because salary isn’t the only thing that determines your home buying budget. You also have to factor in credit score, current debts, mortgage rates, and many other factors. 

Just to show you how much these different factors can affect your home buying power, take a look at a few examples below.

Home affordability by interest rate

Regardless of salary, your mortgage interest rate will affect how much house you can afford.

For those who make low or moderate income, timing your home purchase for when interest rates are low is a great way to increase your home buying budget. 

Annual Income  Desired Monthly Payment Interest Rate (30-Year Fixed)  How Much House You Can Afford
$50,000 $1,300 4.5% $217,900
$50,000 $1,300 4.0% $228,800
$50,000 $1,300 3.5% $240,500
$50,000 $1,300 3.25% $246,600

The example above assumes a 3% down payment and $200 in monthly debts outside the mortgage. Rates shown for sample purposes only. Your own interest rate and payment will vary. 

Remember, your interest rate depends on your credit score and down payment, among other factors. 

So getting the lowest interest rate isn’t just a matter of timing the market; it’s also important to present a strong application and shop around for the best deal. 

Shop today's mortgage rates (Aug 6th, 2020)

Home affordability by down payment 

The amount you have saved for a down payment also has a big impact on what you can afford. Most low-down-payment mortgage loans require at least 3% down. But the more you pay up front, the more you’re allowed to borrow. 

For example, here’s how much a home buyer making $50,000 a year might afford depending on their down payment savings: 

Annual Income  Desired Monthly Payment  Down Payment How Much House You Can Afford
$50,000 $1,300 $7,300 (3%) $234,800
$50,000 $1,300 $13,200 (5%) $263,268
$50,000 $1,300 $28,500 (10%) $285,680

The examples above assume a 3.75% fixed interest rate on a 30-year loan, and $200 in monthly debts outside the mortgage. Your own rate and monthly payment will vary. 

Home affordability by debt-to-income ratio

Your debt-to-income ratio measures your total monthly debts — including mortgage — against your monthly income. The higher your existing monthly debts, the less you’ll be able to spend on your mortgage to maintain a “healthy” DTI. 

For example, say you make $50,000 a year and want to stay at a 36% DTI. 

In that case, your total debts, including mortgage and any other payments (like auto loans or student loans) can’t exceed $1,500. Here’s how that affects your home buying budget: 

Annual Income  Monthly Debts Desired Mortgage Payment How Much House You Can Afford
$50,000 $0 $1,500 $270,600
$50,000 $200 $1,300 $234,500
$50,000 $500 $1,000 $180,406

The examples above assume a 3.75% fixed interest rate and 3% down on a 30-year loan. Your own rate and monthly payment will vary. 

How to calculate your home buying budget on a $50,000 salary

As you can see in the examples above, any two people making $50,000 a year could have very different home buying budgets. 

To figure out how much house you can afford, you need to factor in your own income, debts, down payment savings, and projected housing costs like homeowners insurance and property taxes. Remember, principal and interest on the mortgage aren’t the only costs you’ll pay each month as a homeowner. 

Luckily, you don’t have to do all that math on your own. You can use an online calculator — one that includes taxes and insurance — to estimate your budget. 

Or, you can get pre-approved by a lender to learn exactly how much mortgage you’re qualified for. 

>> Mortgage calculator: Home affordability by income

Why your debt-to-income ratio is key 

While many factors impact the amount you can borrow, your debt-to-income ratio (DTI) is essential to the equation.

DTI compares your monthly gross income to the monthly payment owed on all your debts — including housing costs, The standard maximum DTI for most lenders is 41 percent.

With a $50,000 annual income ($4,167 per month), $1,700 in housing and other monthly payments gets you a 41 percent DTI.

So if $400 of your monthly debt payments go to a car loan, a student loan and minimum payments on your credit card debt, you would have $1,300 to spend for housing.

With a $10,000 down payment and 4.0 percent interest rate, you could probably buy a home for a maximum price of around $200,000.

Consider that same loan — $10,000 down, a 4% interest rate, and a $1,700 monthly payment — but with $0 in existing monthly debts. Your home buying budget immediately jumps from $200,000 to about $300,000. That’s an additional $100K in home buying power. 

8 ways to increase your home buying budget on $50K a year

As you begin to look at houses in your preferred location, you may find that you’d like to increase your price range to get more of what you want in a home. There are several options to consider and discuss with your lender.

1. Increase your down payment

If you have the cash, you may want to up your down payment to 10 or 20 percent. A down payment raises your maximum home price, which may be enough to buy a home that you want.

If you don’t have the cash, keep in mind that you can ask relatives for gift money. And, you can search for homebuyer assistance programs from state and local government programs that provide down payment and closing cost funds.

>> Related: Down payment assistance programs in all 50 states

2. Pay down some of your existing debt

The minimum payment on your accounts determines your debt-to-income ratio. By paying down your credit card debt or eliminating a car payment, you can qualify for more house.

For example, in the scenario above, reducing your monthly obligations by $200 could increase your maximum price to $234,000.

3. Use a piggyback loan to put 20% down

Another strategy that could help you increase your budget a little is to finance your home with a first and second mortgage to eliminate the need for mortgage insurance.

An 80-10-10 mortgage or an 80-15-5 refers to a first mortgage for 80 percent of the home’s cost, a second mortgage of 10 or 15 percent and a down payment of 5 or 10 percent.

This gives you the benefit of having a bigger home buying budget (thanks to the larger down payment) and avoiding mortgage insurance, which is usually required with less than 20% down. 

4. Try a 3%-down conventional loan

It’s possible to get a conventional loan — one backed by Fannie Mae or Freddie Mac – with a down payment as little as 3% of the purchase price. What’s more, that down payment can often be covered by with a down payment assistance grant or gift funds from a family member. 

Just note that to qualify for a 3%-down conventional loan, most lenders require a credit score of at least 620 or 640. For those with lower credit, an FHA loan might be more appealing. 

5. Try a 3.5%-down FHA loan

FHA-insured loans allow 3.5 percent down payments, as long as the applicant has a FICO exceeding 579.  Those with FICOs between 500 and 579 must put 10 percent down.

FHA mortgage insurance can make these loans more expensive, however. They require both an upfront premium and a monthly addition to your loan payment.

Still, FHA allows for much higher debt-to-income ratios compared to conventional loans. Sometimes, you can use up to 50% of your before-tax income or more toward your FHA loan payment.

>> Related: FHA vs. Conventional 97: Which low-down-payment loan is best? 

6. Increase your credit score

Conventional (non-government) loans often come with risk-based pricing, which means if your credit score is lower than 740, you’ll pay a higher interest rate on your loan.

Mortgage interest costs also increase as your credit score decreases.

Take steps to raise your score. It could mean you can lower your interest rate and therefore your monthly payments. You’ll also have a better chance of qualifying for a loan program with a higher debt-to-income ratio if your score is higher.

Verify your home buying eligibility (Aug 6th, 2020)

7. Negotiate with the seller

There is no reason you can’t ask for seller contributions instead of a lower purchase price. Depending on the mortgage you choose, the seller can contribute three to six percent of the home price in closing costs.

This can make all the difference when you want to buy a home and stop renting. Seller contributions can cover closing costs, buy your interest rate down to a more affordable level, or make a one-time payment to cover your mortgage insurance.

>> Related: Getting the home seller to pay your closing costs

8. Consider buying a multi-family home 

One strategy first-time homebuyers often don’t consider is buying a multi-family home instead of a single-family one.

By purchasing a duplex, tri-plex or four-plex, you can live in one unit and rent the others out. This gives you access to primary residence loan programs with low rates and costs, but you also get the advantage of rental income to pay your mortgage.

You can even use a low-rate VA loan or FHA mortgage as long as you live in one of the units.

What are today’s mortgage rates?

Today’s low mortgage rates go a long way toward making houses affordable to those with moderate incomes. Check out available programs and see how much home you can buy.

Verify your new rate (Aug 6th, 2020)

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First-Time Home Buyer