How Much House Can I Afford With $50k Salary?
Having a salary of $50,000 is not always a sign of financial freedom, especially when trying to buy a house. The question is, how much house can I afford with that salary? From being financially savvy about debt-to-income ratio to understanding necessary house expenses and costs, it’s important to examine the financials of a potential purchase before taking the leap. Here are some tips to help you figure out what you can afford on a $50k salary.
Understanding Debt-to-Income Ratios
Your debt-to-income ratio can be an important factor in your ability to apply and qualify for a mortgage loan. Your debt-to-income ratio (DTI) is essentially the ratio of “how much” of your personal income goes into paying for your monthly debt expenses.
To calculate your DTI you’ll need to figure out how much you have available for monthly housing costs, also referred to as debt, and divide this by your gross monthly income. Knowing your DTI can help define what kind of house you’re looking for. Generally speaking, lenders prefer to see a DTI ratio of 40% or less although there are programs that can work with a DTI up to 50%.
Mortgage Loan Affordability
When searching for a house that you can afford with a $50k income, it’s important to note your debt-to-income ratio, but also the maximum loan amount you qualify for. To help determine your maximum loan amount, lenders typically look at your housing expenses as a percentage of your income. Most lenders recommend your mortgage amount not surpass 28% of your gross income, while some lenders recommend a maximum of 36%.
If a lender offers you a loan of more than 28%, you’ll likely be charged additional fees, which can add up and significantly reduce the amount you can actually afford. These ready reckoner rates are not necessarily a guarantee and can vary from lender to lender.
Realistic Budget of Home Expenses
When considering a house purchase it is important to factor in all the expenses involved in ownership. In addition to the mortgage payments and potential additional fees, you will also need to factor in insurance and taxes, utilities, maintenance costs and potential homeowner’s association fees.
A good rule of thumb is to not exceed 28% of gross income on housing expenses, so if your monthly gross income is $4,000, your total housing expenses (including mortgage payment, interest, taxes, insurance and any other housing related expenses) should not exceed $1,120. Also, check the average cost of utilities in the area and look to budget around 7.5% of the total housing expenses.
Down Payment
Another factor that can influence how much house you can afford is the down payment. Generally speaking, the larger the down payment the more house you can afford and the less interest you’ll have to pay over the life of the loan.
When looking at down payments, a 20% down payment is usually recommended because it allows you to avoid private mortgage insurance, or PMI. PMI is an insurance policy that some lenders require when you purchase or refinance your home in order to protect them in the event that you default on your loan. Having to pay PMI can add hundreds of dollars to your monthly mortgage.
Additional House Hunting Tips
When trying to decide how much house you can afford with a $50k salary, be sure to consider the following tips:
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Do your research: Research potential properties including neighborhood comparison, average selling prices, crime rate, and any applicable HOA (homeowner’s association) fees.
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Look at individual needs: When you’re factoring in expenses, consider your own lifestyle needs, such as buying a car.
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Check utility rates: Before deciding, look up utility rates to get a more complete estimate of all of the additional expenses.
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Make sure you’re budgeting for maintenance: Don’t forget the fact that you may need to budget money for regular home maintenance such as repairing leaky pipes, fixing a broken window, etc.
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Ensure you can cover closing costs: When closing on a house, closing costs can range from 2-4% of the loan amount. Be sure you are budgeting for this when shopping for homes.
Buying a home on a $50,000 salary can be a stressful experience but it is possible. By doing your research and understanding the financials of a potential purchase, you can figure out how much house you can realistically afford with the salary you have. Examine your debt-to-income ratio, understand the maximum loan amount you can apply for, plan for ongoing expenses and consider the cost of a down payment.
Then when you have a better idea of what you can afford, go ahead and begin your house search.
