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If I make $70K a year, how much house can I afford?

Valencia Higuera
The Mortgage Reports contributor

What’s your home buying budget?

If you make $70K a year, or a salary within that range, you might be wondering how much house you can afford on your income.

This is need-to-know information, since an understanding of your budget points you in the right direction for house hunting and getting a loan.

But determining affordability isn’t as simple as stating a number.

Salary does play a big role in purchasing power. But it’s only part of the equation.

You can maximize your home buying power if you know all the different factors lenders look at on your mortgage application, and what they want to see.

Check your home buying budget. Start here (Dec 1st, 2020)

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How much house can I afford on $70K a year?

The house you can afford on $70K per year — or any salary, for that matter — depends on quite a few factors.

Aside from your salary, lenders look at your credit score, down payment, debt-to-income ratio, and your likely mortgage rate, among other factors.

Depending on how all these numbers shake out, your home buying budget with a $70,000 salary could look very different.

Take a look at a few examples to see what we mean.*

Your down payment & home buying budget

Salary $70,000/year $70,000/year
Down Payment $15,000 $40,000
Current Monthly Debts $250 $250
Mortgage Rate 3.0% 3.0%
Home Buying Budget $349,200 $409,200

Your current debts & home buying budget

Salary $70,000/year $70,000/year
Down Payment $40,000 $40,000
Current Monthly Debts $150 $500
Mortgage Rate 3.0% 3.0%
Home Buying Budget $432,000 $352,400

Your mortgage interest rate & home buying budget

Salary $70,000/year $70,000/year
Down Payment $40,000 $40,000
Current Monthly Debts $250 $250
Mortgage Rate 2.75% 4.0%
Home Buying Budget $420,800 $367,200

*All examples assume a credit score of 720, a 0.1% annual property tax rate, and a $600 per year homeonwers insurance premium. All calculations were made using The Mortgage Reports home affordability calculator

Verify your home buying budget at today's rates (Dec 1st, 2020)

How to determine how much house you can afford

Your mortgage lender ultimately determines your purchasing power.

However, free online mortgage calculators are excellent tool for getting a ballpark estimate of affordability. 

Before using a mortgage calculator, make sure you research current mortgage rates to get a more accurate estimate.

You can go a step further by checking your credit, and then searching for average mortgage rates based on credit score. 

Once you input your annual income and estimated mortgage rate, the calculator determines the maximum you’re able to spend on a house and the expected monthly payment. 

Consider your total monthly payment

Several different costs are included in a mortgage payment.

It’s important to plan for these expenses, too, so you get a more accurate estimate of what you can afford based on your monthly budget.

The four main components of a mortgage payment are principal, interest, taxes, and insurance.

  • Principal and interest — Principal refers to the loan amount. Interest is the cost of borrowing funds. Each month, a certain percentage of your payment goes toward repaying the principal, and another part goes toward interest. 
  • Property taxes — You’ll pay property taxes on the house, too. Lenders add this amount to your mortgage payment, and it’s paid via an escrow account. Property taxes are based on the value of your home
  • Insurance — Homeowners insurance is required when you buy a house. This protects the property from damages like theft, fire, or natural disaster. You might also have to pay for private mortgage insurance (PMI) if you purchase a home with less than a 20 percent down. This insurance protects the lender if you default on the loan
  • Homeowner’s association (HOA) dues — If you purchase in a community with a homeowner’s association, you’ll also pay monthly HOA fees. These fees might cover the cost of landscaping, community centers, maintenance, trash removal, etc.

Some mortgage calculators don’t factor in all the costs included in your monthly payment. This can give you an unrealistic estimate of how much house you’re able to afford based on your salary.

The reason? You have a set monthly budget — and when your ‘other’ homeownership costs are higher, there’s less of that budget leftover for your core mortgage payment. In turn, this reduces how much house you can afford.

To get a more accurate estimate of your home buying budget, use a mortgage calculator with taxes, insurance, and PMI included.

Or, talk to a lender. They can give you a free mortgage loan estimate with the most accurate number based on your finances and current mortgage rates.

Check your budget with a lender today (Dec 1st, 2020)

Aside from salary, what determines your home buying budget?

Even though salary is a huge determining factor in affordability, other factors also impact your budget. 

The reality is, two applicants earning $70,000 a year might qualify for two different mortgage amounts based on factors such as: 

  • Down payment
  • Credit score
  • Interest rate
  • Debt-to-income ratio (DTI)
  • Employment history

We showed you the numbers above. But here’s a little more information on what each factor means and why it’s important to a mortgage lender.

Down payment

Most home loan programs require a minimum down payment between 3% and 5%.

A bigger down payment reduces the amount you have to borrow to buy a home. This lets you either afford more house — by keeping your down payment percentage small — or reduce your monthly housing expenses by taking out a smaller loan.

If you put down at least 20 percent, you can avoid PMI, which will make your monthly payments more affordable and can increase your buying power.

When you’re budgeting for a down payment, remember to include closing costs in your calculation, too.

Closing costs are typically between 2 and 5 percent of the loan amount, which can add a few thousand dollars to your out-of-pocket costs.

Credit score and interest rate

Your credit score also plays a role in affordability. The higher your credit score, the lower your mortgage rate. 

Interest not only determines your total loan cost, but it also affects how much you pay on a monthly basis. 

Mortgage rates can fluctuate from week to week, or even day to day, based on market conditions. Rates also vary by lender — which is why it’s important to shop around for your mortgage loan and find the best deal.

Debt-to-income ratio

When calculating affordability, your lender also considers your current debt load. 

Your debt-to-income ratio is the percentage of your monthly income that you spend on monthly debt payments. 

A borrower earning $70K a year with student loan payments, a high car payment, and high credit card payments might qualify for a much smaller loan than a borrower with the same salary and zero consumer debt.

Ideally, your total debts shouldn’t exceed 36% to 43% of your gross monthly income (including the future mortgage payment). But, the maximum threshold varies by loan program. Some lenders allow a DTI up to 50% under certain circumstances.

Unfortunately, high debt payments can reduce your purchasing power.

Therefore, a borrower earning $70K a year with student loan payments, a large car loan, and high credit card payments might qualify for less money than a borrower with the same salary and zero consumer debt.

Employment history

Mortgage lenders aren’t only interested in income. They also evaluate the stability of your income.

In most cases, you’ll need to show a history of two consecutive years of employment to qualify for a mortgage.

That said, a two-year job history isn’t always required. This can help first-time home buyers who may be just starting out in their careers.

The most important thing in a lender’s eyes is income stability. The more predictable your income, the better.

So if most of your income comes from commissions — which aren’t guaranteed — the lender will review your commission income over the previous two years. 

They’ll use your average income over this two-year period for qualifying purposes. If your income is considerably less in any one of those years, you might only qualify for a small mortgage.

Tips to afford more house on a $70K salary

The ability to get more house for your money while earning $70,000 a year is possible, but you’ll need to plan ahead. Here’s what you can do:

1. Save a bigger down payment

Remember, a bigger down payment means you’re able to borrow more. So rather than putting down the typical 3% to 5%, maybe save a minimum of 10% to 15%.

A higher down payment also helps you negotiate a lower interest rate.

2. Try to boost your credit score

You don’t need excellent credit to get a mortgage, but a high score saves money in the long run since you’ll qualify for a better rate. 

Always check your credit history and score before applying for a mortgage. If necessary, take steps to boost your score. Pay your bills on time and pay down your consumer debt.

3. Reduce debt payments

Reducing your debt not only increases your credit score, it also betters your purchasing power. That’s because your DTI ratio is lower.

Come up with a plan to pay off student loans, credit cards, and other debts you have. 

Also, if you’re thinking about buying a house in the near future, don’t take on a new car payment if possible. This added debt can lower your purchasing power quite a lot.

4. Don’t be afraid of PMI

Even though a 20 percent down payment can help you get a lower mortgage rate and increases affordability, this isn’t the right move for everyone. 

As a general rule of thumb, you should never drain your personal savings account for a home purchase.

If a 20 percent down payment means depleting your cash reserve, it’s wiser to put down less money. This way, you retain cash for emergencies.

Understandably, some homebuyers aim for 20 percent down to avoid PMI. 

Yes, PMI is an added expense. But it’s not always a permanent expense. 

As you pay down your mortgage balance, and your home increases in value, you’ll eventually have 20 percent equity. At this point, your mortgage lender might drop PMI, or you can refinance the mortgage and remove this cost.

Paying PMI also helps you buy a house sooner.

Keep in mind that the mortgage and housing market is unpredictable. If you delay buying until you have a 20 percent down payment, you could potentially miss out on low rates and affordable home prices.

Verify your home buying eligibility (Dec 1st, 2020)

Find out what you can afford

So, how much house can you afford while earning $70K a year?

The bottom line is that factors other than salary determine purchasing power. 

Yes, income is a big component of the equation. But you must consider other monthly costs, your down payment, and of course, your interest rate. 

By getting your finances in order and shopping around for the lowest rate, you can maximize your home buying power on any salary.

Verify your new rate (Dec 1st, 2020)