While other factors determine the amount of mortgage a lender qualifies you for, your income plays a considerable role in the loan amount and terms you'll receive from a lender.
This article will analyze how much home you can afford with an annual income of $70k. You'll also learn basic affordability calculation and other essential factors lenders consider when underwriting home loans.
The Rule of Thumb of Home Buying
When looking to buy a home, lenders and financial experts expect several guides from you. One of the significant rules of thumb by financial experts when buying a house or taking out a mortgage loan is that you should only take out a mortgage that is not more than 2 to 3 times your annual income. Going by our case study, your max mortgage amount should be around $140,000 to $210,000.
Another significant rule of thumb by mortgage lenders is that your PITI, that is, Principal, Interest, Taxes, and Insurance, do not exceed 28 percent of your gross monthly income. And that your monthly recurring debts (debt-to-income ratio) do not exceed 36 percent of your monthly gross income.
While the above statements are more of a guide, they are not set in stone. In general, an individual who earns $70,000 might afford a home worth anywhere from $200,000 to nearly $500,000. That is because several variables go into determining your home buying budget. Lenders will typically have to consider your credit score, debt-to-income ratio, down payment, mortgage interest rate, and several other factors.
In the following section, we'll analyze how these variables may affect the amount of home you can afford with an annual income of $70k.
Home Affordability by Interest rate
Regardless of your annual income, the interest rate you qualify for will play a considerable role in the loan amount or the amount of home you can afford. If your annual income is on the moderate-income scale, being able to time your home purchase when the interest rates are low is one of the easiest ways to bump up your home buying budget.
Below is a tabular representation detailing how much home you can afford based on the interest rate you receive from a lender.
|
Annual Income |
Desired Monthly Payment |
Interest Rate (Fixed-30 year) |
How Much Home You Can Afford |
|
$70,000 |
$1,500 |
4.5% |
$280,277 |
|
$70,000 |
$1,500 |
4.0% |
$295,638 |
|
$70,000 |
$1,500 |
3.5% |
$312,223 |
|
$70,000 |
$1,500 |
3.25% |
$321,007 |
For the above example, we assumed that you put forward a 5% down and $300 in monthly debts outside the mortgage. Rates shown in the above table are for sample purposes only. Your interest rate and payment will vary.
Home Affordability by Down payment
Just the interest rate you receive, the money you put towards your down payment will also influence how much home you can afford. While most mortgage loan types will require a minimum down payment of 3%, the more down payment you make, the larger the amount of home you can afford.
For example, here's how much a home buyer making $70,000 a year might afford depending on their down payment savings:
|
Annual Income |
Desired Monthly Payment |
Down Payment (%) |
How Much House You Can Afford |
|
$70,000 |
$1,800 |
$9,742 (3%) |
$324,731 |
|
$70,000 |
$1,800 |
$18,226 (5%) |
$364,525 |
|
$70,000 |
$1,800 |
$39,556 (10%) |
$395,557 |
The examples above assume a 3.75% fixed interest rate on a 30-year loan, and $300 in monthly debts outside the mortgage. Your rate and monthly payments will vary.
Home affordability by debt-to-income ratio
When determining how much home you can afford, your debt-to-income or DTI ratio plays a considerable role. Your debt-to-income is simply the summation of all your monthly recurring debts, including your mortgage payment against your income. The higher your monthly debt, the lesser income you will have to make your mortgage payments.
|
Annual Income |
Monthly debt |
Mortgage payment |
How Much House You Can Afford |
|
$70,000 |
$0 |
$2,100 |
$435,428 |
|
$70,000 |
$200 |
$1,900 |
$384,777 |
|
$70,000 |
$300 |
$1,800 |
$364,525 |
The examples above assume a 3.75% fixed interest rate on a 30-year loan, and 5% in down payment. Your own rate and monthly payment will vary.
3 Ways to Increase your Home Buying Budget on $70K a Year
With the rising price of homes in the U.S, you may have to increase your mortgage amount or save more money if you hope to buy a worthy house on a $70k annual income. Below are three ways you can increase your home buying power.
- Increase Your Down payment
If you have the financial means, putting down at least 10-20 percent of the home sale price can help bump your home buying power. If you cannot save up enough money to raise your down payment, you can take advantage of down payment assistance programs in your area.
- Pay Down Your Existing Debt
By paying down your debts such as credit card debts or auto loans. Like in our above example, by reducing your monthly debt from $300 to $200, you can raise your maximum home loan from $364,525 to $384,777.
- Improve your Credit Score
When giving out a mortgage loan, most conventional loan lenders tend to consider a borrower's credit score and history. Your credit score reveals to the lender the amount of risk involved in giving you a loan. By improving your credit score, you can easily qualify for the best loan terms and lower interest rates, reducing your monthly mortgage payments in the long run.