How much income do you need to buy a $500,000 house? The answer might depend on how you plan to finance your home purchase. Your “cash down” will look different based on whether you choose a conventional or FHA loan.
Also, the current mortgage rate can affect your income-based borrowing power. That’s why getting an official mortgage pre-approval is important for accuracy. Let’s break down the formulas your lender will use so you can be two steps ahead.
Income Needed For a $500k Conventional Loan
Let’s run an example using a conventional loan for a $500,000 house at 6% interest on a 30-year mortgage. Use our mortgage calculator to plug in your custom numbers. We’re also factoring in the 28/36 rule- at 28% monthly home debt. (see below)
- Standard 20% down: $100,000 for a $500,000 house
- This brings us to an “average” monthly mortgage payment of $2,900 with property taxes and homeowners insurance factored in.
Here’s how much income you need to buy a $500,000 house with different debt ratios:
- $0 monthly debt payments: this $500,000 house with a $400,000 mortgage would be affordable to you on a salary of $125k.
- $500 in monthly debt payments: this house could be affordable on a $145k salary.
- $1,000 in monthly debt payments: you could afford this on a salary of $165k.
Additional Considerations
For lenders, your income matters regardless of the size of your down payment. However, you’ll generally have more leeway with income if you have a larger down payment–every dollar you put down is subtracted from the amount you need to borrow.
- While you may not be able to qualify for a $500,000 mortgage on your salary, you may be able to qualify for a $500,000 home using a $400,000 loan if you can drum up a 20% down payment.
- With a conventional loan, 20% down is the norm. However, borrowers with strong credit scores and low debt to income (DTI) ratios can be approved to put down as little as 3-5%, but with a low down you’ll need to pay private mortgage insurance (PMI) if you put down less than 20%.
- Also, you’ll need to factor closing costs into your cost for buying a home. With closing costs averaging 5% of a loan amount, you’re looking at an additional $20,000 on a $400,000 loan. You may also need to pay monthly HOA fees in addition to your property taxes.
- With 20% down, buyers have the option not to skip escrowing home insurance and property taxes. This can help lower your DTI. Some regions have high property taxes. Some homes have high insurance premiums.
Income Needed For a 500k FHA Loan
Now for an FHA scenario: a 30-year FHA mortgage with an interest rate of 6%. We’ll also aim for a 28% home debt, based on the 28/36 rule. (see below)
- Standard 3.5% down: $17,500 for a $500,000 house
- This brings us to an “average” monthly mortgage payment of $3,600 with taxes, insurance, and PMI factored in.
Here are the salary requirements with a few different debt ratios:
- $0 monthly debt payments: this $500,000 house would be affordable to you on a salary of $155k.
- $500 in monthly debt payments: this house could be affordable on a $175k salary.
- $1,000 in monthly debt payments: you could afford this on a salary of $195k.
Apply The 28/36 Rule
Lenders use something called the 28/36 rule when determining borrower eligibility. That means that they want to see no more than 28% of your income going toward your house and 36% of all income going toward debts.
Your lender will be evaluating creditworthiness based on your credit score and employment type. These are just general figures rather than a full guide on income needs to buy a house. For example, someone who works as a freelancer or independent contractor may have a harder time qualifying compared to a W-2 employee.
How Interest Rates Effect Affordability
Let’s also quickly run through how just a 1% change in mortgage rates can impact a home’s affordability on the same salary.
A $500k loan with 20% down equates to:
- 7% rate=$2660 payment (P&I only)
- 6% rate =$2300 payment (P&I only)
- 5% rate=$2140 payment (P&I only)
A 1% difference can change your monthly payment by a few hundred dollars. Empower yourself as a buyer by shopping for the best interest rates, saving for a large down payment, and buying discount points on your mortgage.
