- Current Expenses
- Credit Score
- Length of Employment
- Interest Rates
Your current savings will also determine how much you can afford. Most lenders will require a down payment at closing unless you qualify for a zero-down USDA or VA loan. So, depending on the loan requirements, you will need to put between 5-20% down. Plus, you’ll have to cover closing costs, which are typically between 3-6% of the total loan amount. So, the savings you have in the bank will help determine how large a loan you can realistically afford.
2. Current Expenses
Your current expenses are another factor that will impact your ability to get a mortgage. Consider any car payments, insurance, student loans, child support, alimony, credit card bills, medical debt, or any recurring monthly expenses you owe. The lower your monthly expenses, the more you can realistically afford, so make sure to get a handle on your financial obligations.
3. Credit Score
Your credit score will also significantly impact what type of loan you qualify for and how much you can borrow. Conventional loans require a credit score of at least 680 and above, while other loan programs such as FHA, VA, and USDA loans have laxer requirements. Plus, the length and amount of credit you have will also impact how lenders will be willing to give you. The higher your credit score, the lower your interest rate will be, and the more house you can afford. So, if you just started building credit, you may be approved for a smaller amount than if you have a long credit history, even if your score is good.
4. Length of Employment
The length of your employment history will also impact how much money a bank will be willing to give you. For instance, if you were just recently hired, you’ll likely be approved less than if you’ve been in the field for 25 years. Lenders not only want to see that you make enough money, but they also want to know that you have a long track record of employment because it decreases the likelihood that you’ll default.
5. Interest Rates
The final factor determining how much house you can afford is interest rates. As of July 2022, most 30-year mortgages carry an interest rate between 5.5% and 6%. If interest rates were to drop back to 2021 levels, mortgages would become significantly cheaper, and your buying power would increase. For example, a 1% drop in interest rates would give you about 10% more buying power.
Most experts recommend using the 28% rule when budgeting for a home. According to this rule, your housing expenses should not exceed more than 28% of your monthly income. So, if you make exactly $100,000 per year, you make about $8,333.33 per month. That means you should not spend more than 2333.33 on your housing expenses (28% of $8,333.33). Remember that this will include your mortgage payment and expenses like taxes, insurance, and homeowner’s association fees. So, factor in those costs when applying for a loan.
- Low Credit and Higher Interest Rate
- Good Credit and Average Interest Rate
- Great Credit and Low Interest Rate
1. Low Credit and Higher Interest Rate
Here is an example of a borrower with a lower credit score and less money saved for a down payment. The borrower in this scenario would likely go with an FHA loan that requires 5% down. Here is what the loan profile of this borrower might look like:
Annual Income: $100,000
Credit Score: 645
Down payment: 5%
Interest Rate: 6.882%
Max Loan Amount: $284,500
To stay within the 28% rule, the maximum amount that this borrower could safely afford is $284,500 at 6.882%, which would be a monthly payment of $1777 plus $555 in taxes and fees for a total cost of $2,332 per month.
2. Good Credit and Average Interest Rate
Here is an example of your more traditional borrower with a good credit score and a decent amount saved for a down payment. Their credit profile may look like this:
Annual income: $100,000
Credit Score: 700
Down payment: 15%
Interest rate: 5.809%
Max Loan Amount: $358,600
This borrower could afford up to $358,600 while staying within the 28% rule. That would be a monthly mortgage payment of $1790 and taxes and fees of $543 for a total monthly payment of $2,333.
3. Great Credit and Low Interest Rate
Now let’s look at a borrower with outstanding credentials who can afford the full down payment. Their loan profile would look like this:
Annual Income: $100,000
Credit Score: 750
Down payment: 20%
Interest Rate: 5.584%
Max Loan Amount: $394,200.
This borrower could afford up to $394,200 while staying within the 28% rule. This would mean a monthly payment of $1807 with an additional $526 in taxes and fees for a total of $2,333.
These are just ballpark estimates, and your rate can also vary greatly depending on your debt, employment history, and other factors. But this gives you an idea of how loan amounts can vary greatly, even if the borrowers have the same annual income.
Your budget and financial situation will determine how much you can afford on a 100k salary, but in most cases, you’ll likely qualify for a home worth between $350,000 to $500,000. For instance, someone with low credit might only be eligible for a $300,000 mortgage, while someone with excellent credit might qualify for a $500,000 mortgage.