How much income do you need to buy the average house?

Aly J. Yale
The Mortgage Reports contributor

How much house can you afford?

The average house now clocks in at $341,600, according to the National Association of Realtors.

On its face, that price tag might seem unaffordable for many hopeful homebuyers. But you don’t need a six-figure salary (or even close) to make it happen.

If you’ve got a great credit score and a 20% down payment, you can actually afford a median-priced home with an income of just $46,500.

Those with lower credit scores and smaller down payments will need slightly more.

Are you hoping to buy a house in today’s market? Here’s what you’ll need to afford it.

Verify your home buying eligibility (Jun 13th, 2021)

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How much does a house cost in 2021? 

In April 2021, a median-priced home cost $341,600.

According to the Federal Housing Finance Agency, prices have risen 12.6% over the year and 3.5% in just the first quarter of 2021.

Home prices jumped the most in Idaho (23.7%), Utah (19.2%), Arizona (17.4%), New Hampshire (16.2%), and Connecticut (15.9%).

Demand has been a huge factor behind the spike in home prices.

With many renters now working from home, and some having saved their cash during the pandemic, there’s a big pent-up demand for housing. Low interest rates are stoking the fire, too.

Today’s home loan programs are flexible. There’s no minimum income required to buy a house.

This leaves many first-time home buyers wondering if they can afford a house in today’s real estate market.

The good news is, home loan programs are flexible. So there’s no minimum income requirement to buy a house.

In fact, low-income buyers can often become homeowners if they know which mortgage loan to apply for.

Here are a few examples to show you how to determine your home buying eligibility based on your annual income and financial situation.

Income to afford a median-priced home 

The income you’d need to afford that $341,600 home probably isn’t as much as you think.

However, the exact amount depends on the loan program you choose, your down payment amount, and your credit score, among other factors.

Let’s look at a few examples:

Prime borrower (20% down)

‘Prime’ borrowers are those with the highest credit scores (think 740 or above) and large down payments, who qualify for a conventional loan.

You do not need to be a prime borrower to buy a new home.

However, having good credit and 20% down will make home buying more affordable, even with a low or moderate income.

Here’s what buying a $341,600 home would look like in this scenario:

  • Home price: $341,600
  • Down payment: $68,320 (20%)
  • Fixed interest rate*: 2.95%
  • Loan: Conventional, 30-year fixed-rate
  • Debts: Only $250 in existing monthly debts
  • Income needed: $46,500

Keep in mind this example does not include property taxes or home insurance, as these vary widely from one borrower to the next.

Your taxes and insurance will affect your monthly mortgage payment. So it’s important to factor those in when determining how much house you can afford.

Use a mortgage calculator with property taxes, homeowners insurance, and private mortgage insurance (PMI) to estimate your ‘real’ housing payment and home buying budget.

Find out how much house you can afford (Jun 13th, 2021)

FHA borrower (3.5% down)

Federal Housing Administration (FHA) loans are intended for borrowers with lower credit and/or lower income.

FHA mortgages are more flexible about your credit history and debt-to-income ratio (DTI) than conventional loans, making it easier to qualify.

This FHA loan example represents a borrower with a modest credit score (640 and above) and a minimal down payment.

Here’s what buying a median-priced home would look like in this scenario:

  • Home price: $341,600
  • Down payment: $11,965 (3.5%)
  • Fixed interest rate*: 3.5%
  • Loan: FHA 30-year
  • Debts: $500 in existing monthly debts
  • Income needed: $77,900

Again, this does not include property taxes, home insurance, or mortgage insurance costs. Your mortgage lender can help estimate these on your behalf.

Note that the borrower using an FHA loan needs a higher income to buy a house than a prime borrower. There are a couple reasons for this.

First, this borrower is making a much smaller down payment (3.5% of the purchase price, versus 20% in the previous example). This means they’re borrowing a larger amount to buy the same home.

A larger loan amount means bigger monthly payments. Therefore, the borrower needs a higher monthly income to afford the same house.

In addition, this sample home buyer spends a larger portion of their gross monthly income on existing debts. This can include things like credit card payments, car payments, and student loans ($500 versus $250 above).

The more you spend on monthly debt payments, the less money is left over each month for a mortgage. That means you’ll need a higher income to buy a house if you have lots of existing debts.

Check your FHA loan eligibility (Jun 13th, 2021)

VA or USDA borrower (0% down)

VA loans and USDA loans — backed by the U.S. Department of Veterans Affairs and Department of Agriculture, respectively — are unique in that they don’t require any down payment.

To qualify for a VA loan, borrowers need to be a veteran or active-duty service member. To be eligible for USDA financing, you must buy a home in a qualifying ‘rural area’ (many suburbs and small towns are eligible).

Here’s what buying a median-priced home might look like in either scenario:

  • Home price: $341,600
  • Down payment: Zero
  • Fixed interest rate*: 3.25%
  • Loan: VA or USDA 30-year
  • Debts: $500 in existing monthly debts
  • Income needed: $78,600

Calculations do not include mortgage insurance premiums (required on USDA loans) or home insurance and property taxes.

USDA and VA borrowers might need a higher income than those using a conventional loan, because they’re putting no money down and thus have a larger balance to pay off over the loan term.

There is no minimum income to qualify for a VA or USDA loan.

However, USDA does impose income caps that limit the amount of household income you can earn and still qualify. You can learn more about USDA income limits here.

Check your zero-down mortgage eligibility (Jun 13th, 2021)

*All interest rates are for sample purposes only. Your own mortgage interest rate will be different. You can check your home loan eligibility at today’s mortgage rates here.

What affects your home buying budget? 

As you can see, the amount you’d need to buy a home is highly dependent on the loan program you choose, how much you can afford to put down, and your mortgage rate.

Your existing debts — specifically, your debt-to-income ratio — and your credit score also play a big role.

Generally speaking, the higher your credit score, the lower your interest rate will be. This allows you to afford a higher-priced home with less cash.

If you’re worried your income is too low to buy a house, the best things you can do to help your chances are to increase your FICO score and save as much as possible for a bigger down payment.

You don’t need 20% down, but every little bit helps reduce your loan amount and increase your home buying price range.

Check your home buying eliibility

Home values may be rising, but you don’t need a hefty salary to afford one.

With a good credit score, a right-sized down payment, and few debts, buying a house in today’s market is more affordable than you might think.

Verify your new rate (Jun 13th, 2021)