- Current Expenses
- Interest Rates
Just because you can qualify for a loan of a certain amount doesn't mean you should purchase a home worth that much. You want to make sure you'll feel comfortable making monthly payments and won't struggle to get by. So, before you start looking for a home, you should take stock of your current finances and set your own budget based on what you need in a home and what you can realistically afford.
Your savings is another crucial factor affecting how much home you can afford. First, you will want to be sure you can afford the down payment, which will typically be around 5-20% of the loan amount if you go with a conventional mortgage. So, make sure to budget anywhere from $10,000 to $60,000, depending on the loan size and the lender's requirements. Plus, you'll also want to ensure you have a cushion in emergencies. So, if your savings are on the lower end of the spectrum, you may want to look for cheaper options and vice versa.
Current expenses are another critical factor determining how much home you can realistically afford. Even if you're making $80,000, if you have an expensive car payment, phone bill, child support, alimony, or any other significant expense, it may be wise to go with a lower mortgage payment to avoid putting too much pressure on yourself. Plus, if you have additional debts you're repaying, such as credit cards, student loans, medical debt, or personal loans, it will impact how large a loan the bank will be willing to give you.
The interest rates the bank assigns you will determine your monthly mortgage payment, so it will also dictate how much house you can realistically afford. Interest rates are set based on two factors – your finances and the broader economy. The lender will look at your employment history, credit score, savings, debts, and other financial factors and determine how large a risk you pose of default. They will also look at current interest rates in the country and how expensive it is to borrow money, then offer you an interest rate based on what makes sense for them from a financial perspective.
Most financial professionals say your monthly mortgage payment should not exceed 28% of your gross monthly income. So, if you have a salary of $80,000, your gross monthly income would be $6,666.67. If you use the 28% rule, then your mortgage payment should be around $1,866.67. How much house you'll be able to afford with that payment will depend on your interest rate and the size of your down payment. Here are a few examples.
- Low Credit Low Down Payment
- Average Credit Medium Down Payment
- Good Credit Full Down Payment
Low Credit Low Down Payment
Credit Score: 660
Down Payment: 5%
Interest Rate: 7.852%
Max Home Price: $212,800
With a down payment of 5% and a 660-credit score, with today's interest rates, you'd likely be approved at around 7.852%. That would mean a monthly loan payment of $1451, plus an additional $415 in taxes and fees for a total payment of $1866 on a home worth $212,800, which would keep you within the 28% rule on an $80,000 salary.
Average Credit Medium Down Payment
Credit Score: 700
Down Payment: 15%
Interest Rate: 7.52%
Max Home Price: $250,000
With a 700-credit score and a 15% down payment, your interest rate would likely be around 7.52%, meaning a monthly loan payment of $1,489 and an additional $377 in taxes and fees. So, the most expensive home you could afford while staying within the 28% rule with an $80,000 salary is $250,000.
Good Credit Full Down Payment
Credit Score: 750
Down Payment: 20%
Interest Rate: 7.185%
Max Home Price: $276,000
With a 750-credit score and a down payment of 20%, your interest rate would likely be around 7.185%, meaning a monthly loan payment of $1,497 and additional taxes and fees of about $396. So, the most expensive home price you could afford is around $276,000.
Ultimately, the house you can afford with an $80,000 salary will depend on your credit score, savings, and other variables related to your finances. However, as long as you have decent credit and enough savings to afford the standard down payment, you should feel comfortable purchasing a home within the $200,000 to $300,000 range.