The 35% / 45% model. With the 35% / 45% model, your total monthly debt, including your mortgage payment, shouldn't be more than 35% of your pre-tax income, or 45% more than your after-tax income. To calculate how much you can afford with this model, determine your gross income before taxes and multiply it by 35%.
Your Mortgage Is More Than 30 Percent of Your Income
If you're currently spending more than a third of your income on your mortgage, consider moving to a less expensive home, or talk to your banker about refinancing your mortgage over a longer period to reduce the monthly payment.
According to this rule, a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans and credit cards. Lenders often use this rule to assess whether to extend credit to borrowers.
Aim to keep your mortgage payment at or below 28% of your pretax monthly income. Aim to keep your total debt payments at or below 40% of your pretax monthly income. Note that 40% should be a maximum. We recommend an even better goal is to keep total debt to a third, or 33%.
"House poor" is a term used to describe a person who spends a large proportion of his or her total income on homeownership, including mortgage payments, property taxes, maintenance, and utilities.
So if you earn $70,000 a year, you should be able to spend at least $1,692 a month — and up to $2,391 a month — in the form of either rent or mortgage payments.
Some experts suggest that the total amount you pay towards your mortgage should not exceed 28% of your gross (rather than net) income. And you should make sure that you don't go over 36% of gross income for the total amount you spend on all borrowing, including mortgage.
When attempting to determine how much mortgage you can afford, a general guideline is to multiply your income by at least 2.5 or 3 to get an idea of the maximum housing price you can afford. If you earn approximately $100,000, the maximum price you would be able to afford would be roughly $300,000.
Buying too expensive a home can have consequences. It can cause you financial stress, push you to fall behind on other bills, or, in a worst-case scenario, result in foreclosure if you reach the point where you can't keep up with your mortgage payments.
If you're spending more than 30% of what you take home on your basic housing costs, it's a clear indication that you're spending too much.
The Income Needed To Qualify for A $500k Mortgage
A good rule of thumb is that the maximum cost of your house should be no more than 2.5 to 3 times your total annual income. This means that if you wanted to purchase a $500K home or qualify for a $500K mortgage, your minimum salary should fall between $165K and $200K.
If you're following the rule of 30/43, you'll spend no more than $1,500 (30% of $5,000) a month on home payments. This includes principal, interest, taxes, insurance, and PMI if you put down less than 20%.
Yes, 2.875 percent is an excellent mortgage rate. It's just a fraction of a percentage point higher than the lowest-ever recorded mortgage rate on a 30-year fixed-rate loan.
The rise of remote work since the start of the pandemic gave those with higher incomes the flexibility to move just about anywhere. That's led to markets all over the country experiencing an influx of wealthier buyers, and higher housing prices as a result.
Can you get a mortgage based on 6 times your salary? While it's uncommon, yes, it is possible. It's more difficult to get a mortgage using a 6 times income multiple as providers view the loan as higher risk.
What is the 50/30/20 rule? The 50/30/20 rule is an easy budgeting method that can help you to manage your money effectively, simply and sustainably. The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants and 20% for savings or paying off debt.
What portion of your income should go to your mortgage? Many lenders and mortgage experts adhere to the 28% limit – meaning your monthly mortgage repayments should not exceed 28% of your gross monthly income or the amount you earn before taxes are deducted.
Safe debt guidelines
So start by doing the math. If you make $50,000 a year, your total yearly housing costs should ideally be no more than $14,000, or $1,167 a month. If you make $120,000 a year, you can go up to $33,600 a year, or $2,800 a month—as long as your other debts don't push you beyond the 36 percent mark.
That said, if you make $200,000 a year, it means you can likely afford a home between $400,000 and $500,000.
With the median U.S. income being about $80,000 a year, a household of four earning between roughly $52,000 and $175,000 a year is considered middle class.
Some of the reasons include: not having a down payment, having bad credit or a high debt ratio, having no job security, and renting being 50% cheaper. Other reasons include: moving frequently, being in an unstable relationship, being in a declining market, traveling a lot, or the fact that everyone else is doing it.
At the national level, the gap between home buying costs and rent widened in 2022. Overall, first-time home buyers paid an average of $561 more per month than the median renter ($2,437 versus $1,876) in June. That monthly discrepancy compared to $171 ($1,815 versus $1,644, respectively) in 2021.
Home as an investment:
Besides property prices usually appreciate over the long term. Buying a home means you are also enhancing your wealth over time. Delaying your property purchase will result in having to invest a higher amount (in addition to having paid rent over an extended period of time).