I Make $70k a Year-How Much House Can I Afford?

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I make $70k a year-how much house can I afford? Determining how much house one can afford is a big question and there is a lot of work that goes on in the background in preparation for that purchase.  In this article we’ll address that question using 3 key factors.

1. Debt to Income Ratio

It goes without saying that your income plays a tremendous and probably the biggest role in how much house you can afford. Naturally if you make $70,000 a year, the likelihood of purchasing a $1MM hope is very low unless you have very aggressive savings and investments put aside. However, one other key factor linked to your income is your debt to income ratio. Utilizing the 28/36% rule is a good way to determine how much debt you should take on relative to your income. If you follow this rule, your monthly housing expenses shouldn’t exceed 28% of your income with your total debt not exceeding 36% of total income. For example, with a $70k income, your monthly housing expenses should not exceed $19,600 ($1,633 monthly) and total debt should not exceed $25,200 ($2,100 monthly). 

2. Mortgage Terms

When taking on a mortgage you’ll want to look at three key things: 1) interest rate 2) down payment 3) mortgage term.

  • Interest rate: The average 30 year fixed-interest rate has hovered around 3.8% over the past five years (1). The interest rate secured depends on a number of factors including credit score. You can access your credit report here.
  • Down payment: The average down payment in the US is equivalent to 6% of the loan value (2). Some properties such as cooperatives may require a down payment as high as 20-25%. Some programs offer you 0% down but you have to meet very specific qualifications. The amount of down payment will depend on cash reserves, type of home, and loan terms.
  • Mortgage duration: Most fixed rate mortgages fall under either a 30 year or 15 year. Both have their pros and cons. Naturally, a borrower will spend less time paying off a mortgage with a 15-year term and will incur less interest, but will have to make higher monthly payments to compensate. A 15-year term may be better suited for those with more cash on hand. The 30-year mortgage is the more popular term because it is more affordable to most in the short-term, accounting for 70% of all mortgages (3).

Each of these factors will affect the amount of house you can purchase on a $70,000 income. A lower interest rate leaves more room for a higher purchase price. A higher down payment will lower the monthly payment. A 15-year mortgage will help the borrower pay off the loan faster, but may not be affordable to most. The bank will assist the borrower in calculating the mortgage terms and monthly payment.

3. Cash Reserves

One of the biggest mistakes a potential home buyer can make is to throw all their available cash at a home upfront in the form of a down payment. The reality is that purchasing a home comes with a lot of additional costs beyond just the down payment. Closing costs, lawyer’s fees, and potential home repairs/remodeling will require the purchasers funding. Closing costs will average anywhere from 2-6% of the purchase price so it’s important to have this money on hand when signing off on the home. Some banks or cooperatives will even require that you have 2-3 months of mortgage payments available in your bank account at the time of closing to ensure you can make payments in the event of job loss. Cooperatives can be even stricter, requiring up to 12-24 months of mortgage and maintenance in the bank at time of closing.

Maintaining a cash reserve at closing is a super important factor when deciding how much house to afford. Save money ahead of time to ensure you’re a viable candidate.

So really...how much house can i afford?

The real answer is…it depends. However, to help put all of this into context, below is a fictitious example of how much house to afford on a $70,000 income assuming the national averages. This example only serves to provide context and should not be used for all situation. Consult with a loan officer to determine the appropriate mortgage terms for your personal situation.

Income: $70,000

Mortgage Duration: 30 year

Interest Rate: 3.8%

Down payment: 6%

Debt to Income ratio: follow the 28/36% rule

Other debts: $0

Assuming the borrower has no other debt, the max purchasing price would equate to about $311k (monthly payment 36% of total income). If there are other debts, the max purchase price dips to about $244k (28% of total income).  Note that there can be tremendous fluctuation based on the terms noted above so it is extremely important to consult with a loan officer to negotiate the best terms.

(1) 30 Year Fixed Rate Mortgage since 1971. Freddie Mac. http://www.freddiemac.com/pmms/pmms30.html

(2) What is the Average Down Payment on a House? Victoria Araj. January 28, 2021 https://www.rocketmortgage.com/learn/what-is-the-average-down-payment-on-a-house#:~:text=The%20average%20down%20payment%20in,loan%20or%20a%20VA%20loan.

(3) 15-year fixed vs. 30 year-fixed: the pros and cons. November 19, 2019 https://www.thetruthaboutmortgage.com/30-year-fixed-vs-15-year-fixed/

*all prices and calculations were determined using the nerdwallet mortgage calculator.