Can I afford a $200K mortgage?
An annual income of around $45,000 is likely enough for most people to be approved for a $200,000 mortgage. Keep in mind, though, that this is a rough estimate that makes certain assumptions about the home buyer’s personal finances.
The income you’ll need depends on several factors, including your credit score, debt-to-income ratio, and down payment amount, to name a few. Here’s how to determine whether your income level is enough for a $200K home loan (or possibly more).
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Income needed for a $200,000 mortgage: Examples
We’ve done some calculations to show the range of incomes that might get you approved for a $200,000 mortgage. These are only examples and your own financial situation will be different. But you can use the numbers as a general benchmark when evaluating real estate prices.
Note that these scenarios assume a 30-year fixed-rate mortgage and a 36% debt-to-income ratio. Many lenders will approve borrowers with a DTI as high as 43%. So if your salary is in the range below you might qualify for a mortgage amount that is higher than $200K.
Income of $45,000 a year
You may afford a $200,000 mortgage on a $45,000 income if you have a 3% down payment, a 6% mortgage rate, a good credit score, and no other debts beyond your new housing costs. With that down payment, your $200K mortgage would fetch you a purchase price of just over $200,000
Income of $35,000 a year
You might afford a $200,000 home loan on a slightly lower income — $35,000 per year — if you can put more money down. This example assumes a 20% down payment, a 6% interest rate, good credit, and still no other monthly debt obligations, aside from your new monthly mortgage payment. With that down payment, your $200,000 mortgage might buy you a home with a purchase price of up to $240,000
Income of $84,000 a year
What’s changed to require a higher income? In this scenario, your existing monthly debts are $1,500 and your down payment is only 3%. We’re still assuming your credit score is good, and the rate is 6%. So you may need an even bigger income if you have a lot of existing debt before taking on a mortgage.
You can run your own scenario using our home affordability calculator. Though keep in mind, you’ll only know your exact budget after you talk to a lender and get your finances approved.
Income isn’t the only factor for mortgage qualifying
Of course, mortgage lenders take your income into account when deciding how much they are prepared to lend you. But income is only one factor in a long list that lenders look at to approve your home loan amount. Other important factors for mortgage qualifying include:
- Credit history: The better your credit score, the more loan options you have. Plus, you could get a lower interest rate, which will help increase your home buying budget
- Debt-to-income ratio (DTI): By keeping your other debts low (like credit cards and car loans), you can free up your monthly budget and get approved for a larger mortgage loan
- Employment history: Lenders typically want to see a steady two-year employment history prior to getting a home loan
- Savings and assets: You don’t need a huge amount of savings to get a home loan these days. But if your income is on the lower end, having “cash reserves” in your bank account could help you get a home loan more easily
- Additional housing expense: Homeownership costs like property taxes, homeowners insurance, and HOA dues (if living in a condo or townhome with a homeowners association) will also affect your home buying power. The more expensive your total mortgage payment, the smaller your maximum loan amount
You don’t need to be perfect in all these areas to get a home loan. But improving one area of your finances (like your credit report or down payment) can often help make up for a weaker area (like a lower income).
The size of your down payment is an important consideration in your home buying budget. The more money you put down, the smaller your loan amount will be. That can help you qualify if your income is relatively low.
For instance, say you want to buy a $250,000 home. With a 3% down payment, your loan amount is $242,500 and your monthly mortgage payments are about $1,400 (assuming a 6% interest rate). But if you can put 10% down, your loan amount drops to $225,000. Your monthly mortgage payments are almost $100 cheaper. This can make it easier to qualify for the loan payment on your mortgage.
Additionally, those who are financing a home purchase with a conventional loan will pay private mortgage insurance (PMI) when they put less than 20% down. PMI can be canceled when the home reaches 20% equity, but for the first several years, these insurance premiums are paid along with your mortgage payment. So again, home buyers with larger down payments can pay less per month on a $200,000 house.
Debt-to-income ratio (DTI)
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income, or pre-tax income, that goes toward your monthly debt payments. Those include things like minimum credit card payments, child support, alimony, and installments on auto loans, student loans, and personal loans.
Mortgage lenders use your DTI ratio as a benchmark for affordability. The higher your existing debts are, the less monthly income you have to spare. That will affect how large of a mortgage payment you can afford.
- In the example above, a home buyer with $1,500 in monthly debt payments (43% DTI) needs an $84,000 salary to qualify for a $200,000 mortgage
- A borrower with no existing debts, on the other hand, might qualify for the same mortgage loan amount with an annual income below $40,000
Your DTI is made up of two parts: front-end ratio and back-end ratio. As a rule of thumb, back-end ratio is the more important of the two. And lenders prefer it to be no greater than 43% for most mortgage programs. By paying down your total debt before you buy a home — and avoiding taking on new debts — you can lower your DTI. This could substantially increase your home buying budget.
Loan type and interest rate
The type of loan program you choose can affect the mortgage rate you’re offered — and therefore the sum you can borrow. The differences tend not to be huge, but every bit helps when you’re paying interest on a large sum over a long time.
Let’s take a single month, September 2022, as an example that shows those differences. We got our figures from the most recent Black Knight Data Report.
Here were the average interest rates across three major loan types:
- All loans: 7.08%
- Conventional loans: 6.72%
- FHA loans: 6.52%
- VA loans: 6.36%
The differences can be even greater if you choose a shorter-term loan (usually, a 10-, 15- or 20-year mortgage) rather than a 30-year mortgage term, or if you opt for an adjustable-rate mortgage (ARM).
Shop around for your mortgage
You can get a better mortgage rate when you choose the right type of mortgage. But you could save at least as much — sometimes more — simply by comparison shopping for your loan.
Federal regulator the Consumer Financial Protection Bureau has studied the potential savings. Its research suggests that comparison shopping for a mortgage loan saves the average buyer about $300 per year and “many thousands” over the life of the loan.
And yet, “In recent studies, more than 30 percent of borrowers reported not comparison shopping for their mortgage, and more than 75 percent of borrowers reported applying for a mortgage with only one lender,” reports the CFPB.
The good news is, most lenders offer online preapprovals these days. So you can get quotes and compare them quickly and relatively easily. Remember that finding the lowest rate doesn’t just save you money; it could make all the difference in affording the home you want.
How to find your maximum loan amount
You can use our mortgage calculator to estimate how much you can borrow, just as we did earlier. But don’t miss the three tabs near the top of the page:
- By home price: You’ve seen a home you like and want to know if you can afford the purchase price
- By income: How much can you borrow given your income, DTI, and down payment?
- By monthly payment: You know how much you can afford to pay each month for your mortgage. So how much can you borrow?
Click the tab you want and simply change the default figures to your own. You’ll find it pretty straightforward but read the instructions below the calculator if you have any concerns.
Tips to maximize your home buying budget
We started with the question, “How much income do I need for a $200,000 mortgage?” And we have demonstrated that there’s no easy answer.
What we can do is give you some tips for maximizing your home buying budget on your current income.
- Pay down debts before you buy a house: Help your DTI by paying down credit cards and, where possible, prepaying installment loans so you reduce your monthly debts
- Improve your credit score: Get all your credit card balances below 30% of their respective credit limits. And keep making all your payments on time. Also, don’t open new credit accounts or close old ones before closing
- Save up for a bigger down payment: The higher your down payment, the less you need to borrow for the same home. Or you could buy a bigger home. And a high down payment generally means a lower mortgage rate
- Look into down payment assistance programs. If you’re a first-time home buyer, you may be in line for home buying assistance in the form of grant money or no-interest loans that cover all or part of your down payment and closing costs. This guide has DPA programs in all 50 states
- Comparison shop for your mortgage rate: A lower rate means big savings or a better home
- Don't switch jobs unnecessarily: Lenders typically want to see a steady two-year employment history within the same role or field
- Build up your savings and assets: These make you a low-risk borrower and may earn you a bigger loan amount
Of course, it’s difficult for anyone to do all these things at once. But start where you can. Even a small improvement in your credit score or DTI can make a big difference in your home buying budget. Remember, every little bit counts!
Your next steps
How much income do you need for a $200K mortgage? That’s at least partly up to you. The better your finances look (decent down payment, good credit score, low debts), the more house you’ll be able to afford on your income.
Want an exact number? Connect with a lender who can verify your eligibility and tell you just how much house you can afford.