If you make $75,000 a year, you’re doing a little better than half the country. According to the U.S. Census Bureau, the median household income in 2021 is $70,784, so an extra $4,216 puts you in the top 50% of earners. However, frustratingly high inflation is causing everything to cost more, including real estate, so you won’t have as much money as before. Read on for key considerations to keep in mind as you try to determine how much home you can buy with a $75,000 salary.
Start with the 28/36 rule
So, how much of your salary should you spend on housing costs? Historically, the 28/36 rule has been a guideline used by many lenders to help understand a borrower’s ability to repay mortgages and other debt. The rule recommends spending no more than 28% of income on housing expenses and no more than 36% on total debt, including housing.
If your annual income is $75,000, your monthly income is $6,250. To meet Rule 28 of the 28/36 rule, this means that your monthly mortgage payment should not exceed $1,750. For Part 36, your total monthly debt should not exceed $2,250.
Of course, buying a home is more complicated than following simple rules. Bankrate’s New Home Calculator can help you calculate all the numbers for a deeper and more detailed understanding of how much you can afford.
What factors determine how much you can afford?
Obviously, your salary is the number one factor you can spend on your home. But the amount you can afford also depends on your other debts, including car payments and student loans. Here are some other important factors that can have an impact:
Your credit score reflects your risk as a borrower. Any lender will look at this number to see your record of paying off other debts, which helps them assess your likelihood of defaulting on your loan. Traditional loans typically require a minimum credit score of 620, but higher scores can help you qualify for lower rates.
“Improving your credit score can have a significant impact on monthly payments,” said Libby Cooper, vice president of operations at Zillow Mortgages. “For example, a borrower with an ‘excellent’ credit score — between 740 and 850 — may have Eligible for a 30-year fixed-rate mortgage with an interest rate 1.5 percentage points higher than someone with an ‘average’ credit score. — Between 620 and 639. This equates to a difference of about $300 in monthly mortgage payments [principal and interest only] 30-year fixed loan with over $100,000 in interest based on the current price of a typical U.S. home [approximately $355,000]. “
How much of that $75,000 annual salary do you manage to put into your savings account? Paying a higher down payment reduces the amount you need to borrow, reducing your monthly mortgage payments. For example, consider a breakdown from Bankrate’s mortgage calculator to see how different down payments on a $320,000 home, assuming a 7% interest rate, would affect monthly mortgage payments:
|down payment||monthly mortgage payment|
On your $75,000 salary, the 28% rule means spending no more than $1,750 a month on housing. So if you don’t want to overextend yourself, you’ll need to lower your fees by 20% — or find a cheaper home. (Note that this example does not include other common homeownership costs, such as property taxes and home insurance.)
Your loan-to-value (LTV) ratio also plays an important role in determining your purchasing power. Lenders want to see a 20% down payment on an 80/20 LTV. A smaller down payment will trigger automatic mortgage insurance premiums, which means you need to budget for another expense: private mortgage insurance.
In addition to your mortgage, you may have other debts, such as student loans, car payments, and credit cards. The lender will assess your overall debt-to-income (DTI) ratio (which is ultimately what 36 of the 28/36 rule refers to) to make sure you don’t over-stress your finances when trying to pay off all your loans.
“While most mortgage products allow up to 40% to 50% DTI, the 20% range is more favorable,” said Eileen Derks, senior vice president and head of mortgage lending at Laurel Road. “This will minimise repayment risk in the event of unexpected charges or a significant rise in interest rates on variable rate credit products. It’s best to live within your means and expect [that] Over the life of a mortgage loan, unexpected charges will almost always occur. “
Know Your Mortgage Options
Fixed rate, adjustable rate, traditional rate, FHA, VA – there are many different financing options for buying a home. The best way to figure out how much you can borrow is to get pre-approved for a mortgage. Mortgage specialists can listen to your needs, view your financial information (payslips, tax returns, credit reports, etc.) and provide you with a solid estimate of your purchasing power. The amount you pre-approve means the lender may eventually formally approve your amount.
Once you’ve found a home and are ready to complete your mortgage, shop around. (You can go with the same lender who pre-approved you, but you’re not obligated to do so.) Interest rates are the biggest headline you’ll notice when looking at different loans, but there are many other puzzles that need to fit as well. What fees does each lender charge? Do you need to buy mortgage credits to get lower interest rates? Do some lenders offer benefits that others don’t?
First Home Buyer Program and Other Assistance
If this math maze has you feeling overwhelmed, don’t worry. At the federal and local levels, there are many assistance programs designed specifically for first-time home buyers. There are also many down payment assistance programs out there. Also, depending on where you live and your family size, your $75,000 annual income may actually help you qualify as a low-to-moderate-income borrower—a distinction that could allow you to get low-cost loans and grant down payments and transaction costs.
Also, depending on how you make a living, you may qualify for better borrowing terms. For example, teachers, law enforcement, EMTs, and firefighters are eligible to participate in HUD’s Good Next Door program. If you fall into one of these categories, you may be able to buy a home at a very deep discount.
stay the course until you really close
You’ve figured out how much you can afford with a $75,000 salary, signed a contract for a new home and taken out a mortgage — but your work isn’t done. Once the lender has approved you based on all of your personal financial information, that information needs to stay the same until the day you close. Now is not the time to do anything that might change your situation, like buy a new car or open a new credit card.
“Prospective homebuyers should avoid making major financial adjustments prior to closing their home,” Cooper said. “This includes changing jobs or quitting, closing an account in an attempt to remove it from your records or making a major purchase that requires financing, such as a car or new furniture.”