Affording a $400,000 house depends on several factors, including your income, expenses, credit score, and the interest rate on your mortgage. Lenders typically use a debt-to-income (DTI) ratio to determine how much you can afford to borrow, which is the percentage of your monthly gross income that goes towards debt payments, including your mortgage, property taxes, and insurance.
A commonly used guideline is that your DTI ratio should not exceed 28% for housing expenses, and your total DTI ratio, including all debts, should not exceed 36% of your monthly gross income. However, it’s important to note that these are general guidelines, and individual lenders may have their own criteria.
To determine how much you need to make to afford a $400,000 house, let’s assume you have a DTI ratio of 28% for housing expenses and a total DTI ratio of 36%. Based on these assumptions, here’s a breakdown of the steps to calculate the income required to afford a $400,000 house:
- Calculate your monthly housing expenses: Your housing expenses typically include your mortgage payment, property taxes, and insurance. Let’s assume the monthly mortgage payment for a $400,000 house with a 20% down payment (i.e., $80,000) and a 30-year fixed-rate mortgage at an interest rate of 4% is $1,523. Your property taxes and insurance may vary depending on your location, so it’s important to research and estimate these costs accurately.
- Determine your total monthly debt payments: Your total DTI ratio should not exceed 36% of your monthly gross income. So, if your housing expenses are $1,523, your total monthly debt payments should not exceed $1,077 (i.e., 36% of your gross income – $1,523).
- Calculate your monthly gross income: To calculate your monthly gross income, you need to consider your pre-tax income from all sources, such as your salary, bonuses, commissions, and any other regular income. Let’s assume your total monthly debt payments should not exceed $1,077. Therefore, your monthly gross income should be at least $2,992 (i.e., $1,523 + $1,077).
- Determine your annual gross income: To calculate your annual gross income, you need to multiply your monthly gross income by 12. Using the example above, your annual gross income should be at least $35,904 (i.e., $2,992 x 12).
- Consider other expenses: In addition to your housing expenses, you need to consider other monthly expenses, such as utilities, maintenance, homeowner association fees, and other living expenses. It’s important to factor in these costs to ensure you have enough disposable income to cover all your expenses comfortably.
- Check your credit score: Your credit score also plays a crucial role in determining your mortgage eligibility and interest rate. A higher credit score typically results in a lower interest rate, which can affect your monthly mortgage payment. Make sure your credit score is in good shape before applying for a mortgage to get the best possible terms.
- Consider a larger down payment: Making a larger down payment can lower your monthly mortgage payment and reduce the amount you need to borrow, which can make it easier to afford a $400,000 house. In our example above, we assumed a 20% down payment of $80,000, but you can choose to make a larger down payment if you can afford it.
- Get pre-approved for a mortgage: It’s important to get pre-approved for a mortgage before starting your home search. This will give you a clear understanding of how much you can afford based on your financial situation and the current interest.
