June 16, 2024
The 28/36 rule is a good starting point when determining what salary you need for a $700,000 home purchase.

By Ruben Caginalp, Bankrate.com

Does your dream home have a $700,000 price tag? That’s well above the National Association of Realtors’ median price for a home, which in July 2023 was $406,700. Whether you can afford such a pricey purchase will depend on a variety of factors, including your salary and the interest rate of your mortgage.

Use Bankrate’s mortgage calculator to figure out how much you need to make to afford a $700,000 home:

Assuming a 30-year fixed mortgage and a 20 percent down payment of $140,000, at an interest rate of 6.5 percent, your monthly principal and interest payment would be $3,539. That’s more than $42,000 per year on principal and interest alone.
Round that monthly figure up to around $4,200 to account for property taxes, homeowners insurance and potential HOA fees, all of which vary widely. That makes your total annual housing bill $50,400.
Now apply the common rule of thumb that you shouldn’t spend more than about a third of your income on housing. The $50,400 figure, multiplied by three, comes to $151,200 — that is the minimum salary you’d need in order to afford this home purchase.

To reiterate, these numbers will vary drastically depending on variable factors like your homeowners insurance premium and local property taxes. Your monthly payment will be lower if you snag a lower mortgage rate, higher if it’s higher; and your payment will be higher if you make a down payment of less than 20 percent as well. Here’s a deeper dive into how much income you’d need to afford a $700,000 home.

Income to afford a $700K house

The 28/36 rule is a good starting point when determining what salary you need for a $700,000 home purchase. This real estate rule of thumb recommends that no more than 28 percent of your total monthly income should go toward your monthly housing costs, and that no more than 36 percent go toward overall debt payments (including housing).

Here’s how the rule works for the annual income of $151,200, as determined above. Dividing by 12 for a monthly amount comes to $12,600, and 28 percent of $12,600 is $3,528 — almost exactly equal to the monthly principal and interest figure roughly determined above. But don’t forget that you’ll need to factor in the variable monthly fees that get rolled into your housing payment, such as property taxes and insurance premiums.

As you run the numbers, keep the 36 part of the equation in mind as well. Other monthly debt, like car payments, credit card balances or student loans, can add up, and you don’t want to stretch your budget too thin by exceeding that 36 percent guideline. There are also the ongoing costs of homeownership to stay on top of, such as maintenance and upkeep.

In addition, remember that a $700,000 budget can take you quite far in most areas of the country. According to Redfin data from July 2023, the median sale prices in many major cities are much less — including Washington D.C. ($617,000), Denver ($587,000), Miami ($580,000), Phoenix ($436,824) and Atlanta ($385,000). Just because you can afford to spend $700K doesn’t mean you need t0 (or should).

What factors determine how much you can afford?

As you evaluate how much home you can afford, there are many factors to consider besides the property’s sticker price. Some of the most important include:

Down payment: The larger your down payment on a house, the less you need to borrow — and so, the smaller your monthly mortgage payments will be. This is especially true with higher-priced homes: A 20 percent down payment on a $700,000 home means $140,000 that you won’t have to pay back, with interest.
Loan-to-value ratio: Your down payment will also determine your loan-to-value ratio, or LTV. This figure represents how much of the home’s total value you are borrowing.
Mortgage rate: Higher rates mean more interest to pay. Even one percentage point makes a big difference: The $3,539 monthly payment outlined above for a 6.5 percent interest rate becomes $3,915 at 7.5 percent. That’s $4,512 per year — or more than $135,000 over the life of a 30-year loan.
Credit score: A higher credit score will boost your chances of snagging a lower mortgage rate.
Debt-to-income ratio: DTI is calculated by considering your gross monthly income against your debt obligations each month. The higher your DTI, the more of a risk lenders will likely consider you.
Financing: Before committing to a mortgage loan, do your research and shop around for the various types of financing that you may be eligible for. Many state and local governments also offer down payment assistance and other programs designed to make homeownership more achievable, especially for first-time buyers. Your high salary means you may not qualify, but it’s well worth looking into just in case.

Stay the course until you close

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Once you go into contract on a home purchase, it can take weeks or even months before you actually sit down at the closing table. In the interim, don’t stop monitoring the factors listed above. For example, don’t apply for new credit cards or make purchases that require financing, like a car, because those things impact your credit score. And if possible, don’t make any big life changes that could affect your financial status either, such as starting a new job.

For most buyers, working with a knowledgeable local real estate agent is invaluable. Interview a few people to find a good fit for you. An agent will be able to guide you through the entire homebuying process with professional expertise.

FAQs

Can I afford a $700K home with a $200K salary?

Most likely yes. Assuming a 20 percent down payment on a 30-year fixed-rate mortgage with a 6.5 percent interest rate, you’ll pay about $4,200 per month in housing costs on a $700,000 home purchase. According to the 28/36 rule, you should spend a maximum of 28 percent of your income on housing. For a $200,000 salary, 28 percent equates to $4,666 per month, which is more than enough to cover the monthly $4,200 cost. Just be careful to factor in your other debts and expenditures, to ensure you don’t stretch yourself too thin.

What factors affect how much house I can afford?

How expensive of a house you can afford will depend largely on your income, your credit score and the prevailing mortgage interest rates. Location matters a lot too, as the same housing budget can go much further in some places than others. You should also evaluate the cost of living in your desired area, as well as the ongoing maintenance costs associated with homeownership.

Visit Bankrate online at bankrate.com.

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