How Much House Can I Afford With 100K Salary? Understanding Housing Affordability in 2023

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How Much House Can I Afford With 100K Salary

Finding the right home within your budget requires careful consideration of various factors. These comprise your personal financial situation, the prevailing housing prices in your locality, your specific requirements for a home, and your long-term financial objectives. Indeed, you should take into account your future aspirations beyond purchasing a house. So, how much house can I afford with a 100k salary? Let’s explore!

Start With the 30% Rule for Home Buyers

Financial advisors profess that the best personal finance tip for an American employee is to allocate approximately 30% of monthly earnings towards housing expenses. With $100,000 per year earnings and following the 30% rule, allocations should be approximately $2,500 per month for housing payments.

Having a 10% initial down payment and a steady 6% interest rate, you would probably be capable of acquiring a dwelling valued at approximately $350,000 to $400,000 (taking into consideration tax and home insurance expenditures).

While commonly referred to as the “30% rule,” it is advisable for potential home purchasers to perceive it as a general recommendation rather than a strict regulation.

For instance, an individual earning $100,000 without any outstanding financial obligations and dependents could potentially allocate 40% or even higher of their earnings toward housing costs. Conversely, another individual earning the same amount, but burdened by two car loans, a substantial student loan debt, and a large family, might only be able to allocate 25% of their income toward housing.

The additional expenses associated with owning a home, such as land levies, household coverage, private mortgage protection, and homeowners association fees, will also influence your home purchase budget. These supplementary monthly expenses have an impact on your overall budget for purchasing a home. Minimizing expenditure on these extra fees can enhance your ability to afford a more desirable home.

How to Determine What House Can I Afford on 100K A Year?

Manage Savings

Your existing savings will also influence the amount you can manage. The majority of lenders will demand an initial payment at closing unless you meet the criteria for a USDA or VA loan that requires no down payment. Consequently, based on the loan prerequisites, you must provide a down payment ranging from 5% to 20%. Furthermore, you will need to account for closing expenses, which usually range from 3% to 6% of the overall loan sum. Thus, the funds held in your bank account will play a crucial role in assessing the possible loan amount you can undertake. SpoliaMag team highly recommends reading these personal finance books to boost your savings.

Mortgage Eligibility

The amount of money you currently spend is an additional element that will influence your eligibility for a mortgage. Take into account any payments for your vehicle, insurance, educational loans, financial support for children, spousal maintenance, credit card statements, healthcare debts, or any other regular monthly expenditures you may have. By reducing your monthly outflows, you increase your real affordability, so gaining control over your financial responsibilities is essential.

Credit Score

Your credit score dramatically influences your borrowing potential and loan eligibility. Traditional loans necessitate a minimum credit score of 680 or higher, whereas alternative loan options like FHA, VA, and USDA loans have more lenient criteria. Additionally, the duration and extent of your credit history will also influence lenders’ willingness to provide you with funds. An excellent credit rating corresponds to a reduced interest rate and enhanced affordability when acquiring a residence. Therefore, individuals who have recently initiated credit-building may receive approval for a smaller loan amount compared to those with an extensive credit history, even if their credit score is favorable.

Work Experience Duration

Unless you are enjoying multiple passive income streams, the duration of your work experience will influence the loan amount a bank is willing to offer. For example, if you were recently employed, you’ll probably receive lesser approval compared to someone with 30 years of experience in the industry. Lenders not only assess your income but also consider your extensive employment history, as it reduces the chances of loan default.

Interest Rates

The ultimate element that influences the affordability of a house is the prevailing interest rates. As of July 2022, most 30-year mortgages carry an interest rate between 5.5% and 6%. If interest rates were to drop back to 2021 levels, mortgages would become significantly cheaper, and your buying power would increase. For instance, a 1% decrease in interest rates would grant you approximately 10% additional purchasing capability.

Examples of How Much House Can You Afford With 100K Salary?

Examples of How Much House Can You Afford With 100K Salary?

Let’s explore a few illustrations that reflect various circumstances to understand better the housing options within reach on a $100,000 annual income.

1. Purchasing a Home with a $100,000 salary and excellent Creditworthiness

In our initial illustration, let’s consider an individual earning $100,000 annually and possessing a commendable credit score of 740. He carries no recurring debts and intends to make a 20% down payment toward their desired property.

This purchaser could be eligible for an interest rate of 5.75 percent. By making a payment of approximately $2,495, this individual can acquire a property priced at $450,000. In this scenario, we assume the annual rate for homeowners insurance is $1,200, representing the average in the United States, and the tax rate is 0.78%. As the borrower made a down payment of 20%, the lender imposed no premiums for private mortgage insurance (PMI).

IncomeCredit scoreDown paymentDebtInterest rateEstimated home valueMonthly Payment
$100,000/year74020%$0 a month5.75%$450,000$2,495

2. Purchasing a House with an Annual Income of $100,000 and a Strong Credit Score

The second borrower earns $100,000 per year and wishes to allocate approximately $2,500 toward their monthly house payment. Their credit score stands at 700, and they have non-mortgage debts of $250 per month. The borrower can make a down payment of 15% for the house.

Considering these details, the buyer might be eligible for an interest rate of 6.75%. As a result, they could qualify for a home priced at approximately $360,000. Now, let’s perform the calculations:

IncomeCredit scoreDown paymentDebtInterest ratePrivate mortgage insuranceEstimated home valueMonthly Payment
$100,000/year70015%$250 a month6.75%$200 a month$360,000$2,521

There’s a significant difference in the second scenario as the buyer’s down payment was less than 20%, resulting in the inclusion of private mortgage insurance (PMI). This PMI coverage increased the monthly payments by $200.

Illustration 3: Purchasing a house with a $100K salary and modest creditworthiness

Now, let’s examine a scenario involving a prospective homeowner earning $100,000 annually who possesses a credit score on the lower side and carries relatively substantial debt. This individual could be a recent graduate burdened with student loans, lacking an opportunity to establish a solid credit history. Alternatively, they might have outstanding debt from multiple sources, such as credit cards and a vehicle loan. Regardless of the circumstances, a lower credit score and increased debt levels imply that the home-buying budget will be relatively restricted.

IncomeCredit scoreDown paymentDebtsInterest ratePrivate mortgage insuranceEstimated home valueHouse payment
$100,000/year6505%$1,000 a month7.75%$250$290,000$2,514

The individual possesses a credit score of 650, which remains sufficient to meet the requirements for a conventional loan. However, due to a relatively smaller initial payment, this borrower’s private mortgage insurance (PMI) rate is slightly higher compared to the borrower in the second example.

Please note that these figures are rough approximations, and your specific interest rate may fluctuate significantly based on factors such as outstanding debts, employment background, and other relevant considerations. Nevertheless, this provides a general understanding of the substantial differences in loan amounts, even when borrowers possess identical yearly earnings.

How Much is Required as Upfront Payment for Buying a House?

The subsequent phase in the process of purchasing a house involves setting aside funds for an upfront payment. This payment refers to the initial amount of money you provide when buying a house, while the remaining sum is financed through a mortgage.

The specific amount of upfront payment necessary is contingent upon the chosen mortgage type and the house’s price. A higher upfront payment generally results in a lower interest rate and monthly installment.

After accumulating sufficient funds for an initial payment and enhancing your credit rating, you are prepared to obtain a preliminary mortgage approval. This preliminary approval represents a written confirmation of the amount that a lender is willing to loan you for the purpose of buying a house. Additionally, it provides details regarding the interest rate and repayment conditions for which you meet the requirements.

Bottom Line

Based on my approximate calculations and considering the factors outlined earlier, an individual earning a $100,000 salary should consider searching for a residence within the price range of $320,000 to $450,000. Keep in consideration that in the current high-interest rate climate of 2023, an amount exceeding $300k may not have the same purchasing power it had when interest rates were below 4% in 2022.

The cost isn’t quite as high as you anticipated, correct? Fortunately, in most regions outside major urban centers, a budget of $300,000 to $450,000 can still stretch quite far and enable the purchase of an appealing starter home or a comfortable family residence.

Frequently Asked Questions

What is the 28/36 rule for home buyers?

The 28/36 rule suggests spending 28% of your monthly income on housing costs and 36% on total debt payments, guiding your house’s affordability based on income and debt levels.

How does your credit score affect your home-buying budget?

Your credit score impacts mortgage eligibility, interest rate, and loan amount. A higher score leads to lower rates and a larger loan, enabling a higher-priced house. Conversely, a lower score limits options and increases borrowing costs, potentially requiring a more affordable house.

How much down payment do you need to buy a house with a 100K salary?

Down payment requirements vary based on mortgage type and house price. Higher down payments yield lower interest rates and monthly payments. Typically, initial payments vary between 3% and 20% of the buying cost. For a $400,000 dwelling, initial payments may vary from $12,000 (3%) to $80,000 (20%) when utilizing a traditional loan.

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Being an expert in financial management, Hamza Hamid has made great devotions helping individuals and families to reach concrete financial decisions. His unique hypothetical style makes him keep learning more. No wonder, he keeps getting better at it!