How much house can I afford if I make $150,000 a year?
Earning $150,000 puts you well above the average salary in the U.S — over double the median income, in fact, according to Census data. With this salary, you can likely afford a bigger home than most, and likely in a more desirable location.
But the exact amount of house you can buy will vary depending on the rest of your financial situation, chosen location and preferred property, as well as prevailing mortgage rates. Take the time to better understand how much home you can afford based on credit score, debt-to-income ratio, down payment and more.
The 28/36 rule
The 28/36 rule is a commonly used personal finance formula that breaks down your gross monthly income and estimates how much you can afford monthly in total debts, including housing expenses. This rule of thumb recommends that you spend no more than 28 percent of your income on your housing expenses and not exceed 36 percent of your income on total debt payments.
“The 28/36 rule is also a reflection of your debt-to-income (DTI) ratio,” says Todd Stearn, CEO of the Aragon Company in Brooklyn, New York. “The first number is your front-end DTI, and the second number is your back-end DTI.” The front-end DTI is how much of your monthly income goes toward housing, while your back-end DTI includes all monthly debt payments, he explains. Credit cars, car loans and personal loans all contribute to a back-end DTI.
A $150,000 salary is equal to $12,500 per month in gross income. If you take $12,500 and multiply it by 28 percent, that gives you $3,500, which is the maximum housing expense you should not exceed per this rule. Then, if you multiply $12,500 by 36 percent, you get $4,500, the amount you should not exceed in total debt. That leaves you with $1,000 per month for all your other monthly revolving and installment debts, outside of housing costs.
“Many lenders use the 28/36 rule to calculate the maximum monthly housing payment you can afford,” Stearn says. “This impacts how much money they are willing to loan you.”
How much house can you afford?
The 28/36 rule isn’t the only method of determining how much home you can afford based on a $150,000 annual income. It’s also wise to consider your credit score, debt-to-income ratio, down payment and home style and location.
Your credit score plays an important role in determining which loans and interest rates you may be eligible for. “Typically, people with a higher credit score will find themselves choosing a conventional mortgage loan,” says mortgage broker Joshua Massieh of Pacwest Funding in San Diego.
“Conventional loans require at least a 620 credit score, and the higher your score the better your interest rate,” he says. “You’ll see loan level pricing adjustments — in other words, increased interest rates — for lower credit scores, as there is more risk to lenders for borrowers with tarnished credit.”
Your debt-to-income ratio can be calculated by dividing your total monthly debt payments by your total gross monthly income. This number helps lenders decide whether you will be able to repay your loan on time and make your monthly payments. The higher your DTI, the more difficulty you may have in paying your monthly debts, as there is less wiggle room for error in the event of poor budgeting or an emergency. The lower your DTI, the more lenders view you as a reliable borrower.
“A DTI ratio of 36 percent or less is regarded as good, with lenders preferring it to be under 43 percent,” notes Andrew Lokenauth, founder of Fluent in Finance. “With an annual income of $150,000, a 36 percent DTI ratio allows for a maximum monthly debt expenditure of $4,500.”
Although there are loan programs that allow buyers to claim a home for little to no money down, conventional loan lenders prefer that you make a down payment of at least 20 percent. This is also the threshold to avoid private mortgage insurance (PMI). The lower your down payment, the higher your monthly mortgage payment.
“With a $150,000 income, you could potentially save up to $100,000 – 20 percent – within a few years,” says Shri Ganeshram, CEO of real estate website Awning. “This would allow you to purchase a home in the $500,000 range.”
Home style and location
Another major factor here is the type of home — size, architectural style, age and amenities — and location you’re looking to buy in. A more desirable market and a larger, more luxurious home will come with a higher price tag, which will likely require borrowing more money. Ganeshram notes that you can get more bang for your buck in areas with lower housing costs, such as the Midwest or South.
“Your $150,000 income can go further in some parts of the country compared to others,” Massieh says. “For example, buying a home in California will probably get you a smaller home than that same $150,000 will get you in North Dakota.”
Home financing options
The good news about making $150,000 per year is that your financing options are wider.
Types of loans
Conventional loan: A conventional mortgage loan is the most common type of mortgage, offered and guaranteed through the private sector, not by the government. To qualify, you will probably need at least a 620 credit score, a DTI between 43 percent and 36 percent, and a down payment of at least 3 to 5 percent — though if you put down less than 20 percent, you will need to pay for PMI.
FHA loan: An FHA loan is backed by the Federal Housing Administration and administered by a third-party mortgage lender approved by the FHA. They are particularly popular among first-time buyers because they require lower down payments and credit scores than conventional loans. To qualify, you’ll need a down payment of 10 percent with a credit score of at least 500, or a down payment of 3.5 percent with a credit score of 580 or greater. Other rules apply, too, and you’ll also need to pay mortgage insurance premiums.
VA loan: Guaranteed by the U.S. Department of Veterans Affairs, a VA home loan can be had with no down payment if you are an eligible active duty service member, military veteran or surviving spouse. Participating lenders usually require at least a 620 credit score and may impose other restrictions as well.
First-time homebuyer programs
Depending on the state where you live, there may be a number of first-time homebuyer programs available. These often have income limits, though, so with a $150,000 salary, you may not qualify. If you do qualify, however, you may be able to receive down payment assistance in the form of a second loan or a grant. Some areas also have closing cost assistance programs.
Get preapproved for a mortgage
Before you get serious about shopping for a home, it may benefit you to get preapproved for a mortgage. This will give you a good idea of what lenders are comfortable loaning you, and it will better position you when you’re ready to make an offer. Getting preapproved requires picking a lender, gathering your personal financial documents, checking your credit report and then meeting with the lender to apply. Preapproval can take as little as one business day, and typically lasts for 90 days. Once you’re ready to move forward with a full loan application, you’re under no obligation to stick with the same company that issued your preapproval.
After crunching the numbers on your $150,000 salary, it’s time to take that math, and your homebuyer confidence, to the next level. Shop around, apply and get preapproved for a home mortgage loan. Then, enlist the help of an experienced local real estate agent. Agents are pros who know the market and can collaborate with you on finding the right home in the right location for the right price.