How Much Do I Need To Earn To Buy A House In The USA?
Photo: Adobe Stock.
Many people living in the United States wonder how much money they need to earn to buy a house. The amount you earn annually determines how much money a bank or lender will offer you. However, the lender will also consider your debts and monthly payments to determine if you can take on another debt.
Other factors such as the type of loan you apply for, the interest rate, or even the down payment affect your monthly payment. To better understand how this works, keep reading.
Income, Expenses, and Debts
The relationship between your income and debts is called the "debt-to-income ratio" (DTI), which is crucial in deciding how much lenders will be willing to lend you. Your DTI ratio is the total amount of your monthly debt payments divided by your total monthly household income, expressed as a percentage.
For example, let's say you have three monthly payments:
$800: Rent
$150: Credit card payment
$200: Car loan payment
Total: $1,150
Assuming your total monthly income before taxes is $3,000, your DTI ratio is your debts divided by your income. In this case, it’s $1,150/$3,000, resulting in a DTI of approximately 0.3833 or 38.33%.
The Importance of the Debt-to-Income Ratio in Buying a House
Instead of asking how much you need to earn to buy a house, calculate your DTI. This percentage tells lenders whether you can and are able to take on another debt. Lenders generally like to see DTI ratios of 50% or less. This means that when adding all your monthly payments, they should be less than half of your gross income.
Other expenses included in the DTI are monthly insurance costs, student loan payments, personal loan payments, alimony payments, and daycare expenses.
If your ratio is too high, look for ways to reduce your monthly budget or increase your income.
What Percentage of Your Income Should Go Towards Your Mortgage?
When you qualify for a home loan, the lender will evaluate your DTI and give you a credit line up to a certain amount. You need to make your own decisions about how much debt you want to take on and what percentage of your income you want to allocate to a mortgage.
Though each situation is different, it is generally not recommended to allocate more than 28% of your income to the mortgage. Just because you qualify for a certain amount does not mean you should take it all.
Remember that besides the mortgage cost, you will need to pay insurance and taxes each month.
Calculate Monthly Payments
The average home price in the United States in June 2023 is $402,600. With a 20% down payment, you can expect to pay approximately $2,051 per month for the mortgage (with an annual interest rate of 6.5%). To follow the 28% rule, you should earn at least $7,325, combining all household incomes. This totals $87,900 per year.
Note that these values use an average home price of $402,600. If you find a home for less, the required income will be lower.
Online Mortgage Calculator
Google offers a tool to calculate and estimate monthly payments for a home loan and better understand all the factors affecting home costs.
If you are a first-time homebuyer, select "30-yr fixed FHA" under Loan Term. Choose your state and credit score for a more personalized interest rate.
Your monthly payment will be your monthly payment.
You can also select "Purchase Budget" to enter total household income, monthly debts, and down payment amount.
Play with the numbers and values to determine how much you need to earn to buy a house, how much you can borrow, and the maximum home value you can purchase (in the tool, this is the Purchase Budget).
The Mortgage Amount is the total debt you will have as your mortgage.
Consult a Financial Advisor
Always consult with a reliable financial advisor to help design a personalized investment plan and savings strategies to achieve this goal.
Good luck!