How To Buy a House: Do You Need to Make $114,000 a Year?
Written by
Melanie Grafil, AI Editor
Edited by
Melanie Grafil
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Buying a house is a huge financial leap. It’s seen by many as a badge of honor, representing a major milestone in financial stability.
For many first-time homebuyers, the process can be both exciting and daunting. One important aspect that often raises questions is the income requirement.
Read: 3 Things You Must Do When Your Savings Reach $50,000
In this guide, GOBankingRates explores why you might need to make $114,000 a year to buy a house. Here’s a breakdown of the most essential factors that you should consider.
The Homebuying Process in 5 Steps
Before diving into the income requirements, it’s good to understand the home-buying process. Here are a few things you will need to think about first:
- Financial assessment: Before you start house hunting, assess your financial situation. This includes evaluating your credit score, debt-to-income ratio and savings for a down payment.
- Budget: Determine how much you can afford to spend on a home. Financial experts often recommend that your monthly mortgage payment not exceed 28% of your gross monthly income.
- Down payment: Save for a down payment. This typically ranges from 3% to 20% of the home’s purchase price. The higher the down payment, the lower your monthly mortgage payments.
- Mortgage preapproval: Get preapproved for a mortgage first. This will help you understand how much a lender is willing to lend you based on your financial profile.
- House hunt: Once you have a budget and preapproval, start searching for homes within your price range.
A Note
Realtors tend to prefer that you have a mortgage preapproval first before showing you home. work with you unless you’ve got that preapproval in hand. Of course, this will entirely depend on the kind of relationship you have with your realtor. To be certain, get that preapproval first.
The $114,000 a Year Benchmark
The $114,000 a year figure is often cited as a benchmark for first-time homebuyers. It reflects the average income needed to afford a median-priced home in the United States. Several factors contribute to this estimate:
Median Home Prices
The median home price varies across regions. In areas with a higher cost of living, homes tend to be more expensive. The $114,000 figure is based on the national median home price.
Down Payment and Loan Terms
The estimate assumes a 20% down payment, which is considered ideal for securing a favorable mortgage rate. Loan terms, including interest rates and the duration of the loan, also play a role in how much income you would ideally need.
Debt-to-Income Ratio
Lenders evaluate debt-to-income ratio, which is your ability to manage mortgage payments. It’s a measurement of how much debt you have against your income. The $114,000 figure considers a debt-to-income ratio of around 36%, including the mortgage payment and other debts.
How To Calculate How Much House You Can Afford
While the $114,000 benchmark provides a general guideline, you should personalize your calculations based on your unique financial situation. Here’s a simplified formula to determine how much house you can afford:
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Maximum Affordable Home Price = (Annual Income x Affordability Ratio) / 12
Affordability Ratio
Typically, the affordability ratio is 28-31% for housing expenses, including the mortgage payment, property taxes and insurance.
The debt-to-income ratio, including other debts, is often capped at 36%.
Down Payment
Adjust the home price based on your down payment. If you can afford a larger down payment, it will reduce your monthly mortgage payments.
Interest Rates
Keep an eye on current interest rates. Lower rates can make homeownership more affordable.
Additional Costs To Consider
Beyond the mortgage payment, first-time homebuyers need to factor in additional costs, such as:
- Property taxes: Property taxes vary by location and can significantly impact your monthly expenses.
- Homeowners insurance: Protect your investment by budgeting for homeowners insurance.
- Maintenance and repairs: Set aside funds for ongoing maintenance and unexpected repairs.
- Closing costs: When purchasing a home, budget for closing costs, which typically range from 2% to 5% of the home’s purchase price.
Best Strategies for Making Homeownership More Affordable
If the $114,000 income threshold seems out of reach, consider the following strategies to make homeownership more affordable:
Increase Your Down Payment
A larger down payment can lower your monthly mortgage payments.
Improve Your Credit Score
A higher credit score can result in a lower interest rate, reducing overall costs.
Explore Assistance Programs
Investigate first-time homebuyer assistance programs that offer down payment assistance or lower interest rates.
Consider Different Loan Options
Explore various loan options, such as FHA or VA loans, which may have more flexible requirements.
Final Take
Buying a house is a significant financial commitment, and understanding the income requirements is a crucial step for first-time homebuyers. While the $114,000 a year benchmark provides a starting point, finding a home based on what you can afford in your financial situation is essential.
By carefully assessing your budget, considering any additional costs as well. Think about the different strategies that can help you generate more income as well, to make homebuying more affordable–picking up a side hustle, for example, or selling some of your old stuff for extra cash.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
