If I Make $120,000 A Year What Mortgage Can I Afford?
You can afford a home price up to $470,000 with a mortgage of $446,500.
This assumes a 5% down conventional loan at 7%, standard mortgage insurance, low debts, good credit, and a total debt-to-income ratio of 45%.
Remember that many factors affect this number including property taxes, homeowner’s insurance, HOA dues, and more. Apply with a lender to find your personalized maximum home price.
- $120,000 income mortgage payment breakdown
- Home affordability by monthly debt payments
- Maximum home price by down payment
- Maximum home price by interest rate
- Maximum home price by desired debt-to-income level
- Ways to increase your buying power
- You can afford a decent home with a $120,000 salary in many areas
$120,000 income mortgage payment breakdown
Principal and interest payments aren’t the only costs due each month. Many advertisers leave out other expenses like mortgage insurance and property taxes. But you must factor in all costs that lenders do: property taxes, homeowners insurance, mortgage insurance, and HOA dues.
|Part of payment||Amount|
|Principal & interest||$2,970|
|Monthly mortgage insurance||$197|
|Total payment based on these assumptions||$3,600|
See assumptions for all calculations at the bottom of this article.
Home affordability by monthly debt payments
Your debt level affects your buying power perhaps more than anything else.
For instance, say you have $750 in monthly debt like student loans and credit card payments. This amount of debt isn’t hurting you much. But adding another $500-per-month auto payment would reduce your maximum home price to just $415,000 instead of $470,000.
Lenders can approve you to use up to 45% of your gross monthly income toward debt payments with a strong file. That’s $4,500 for an annual salary of $120,000. About 36% of your gross income ($3,600) can be used for the house payment leaving about $800 for other debts.
|Max house payment (36%)||$3,600|
|Max total debt payments (45%)||$4,500|
Terms you might hear are “36% front-end debt-to-income (DTI) ratio” and “45% back-end DTI.” This just means you’re spending 36% of gross income on the house and 45% on the house plus other debt payments. Borrowers with good credit can be approved with higher ratios, but to be safe we are using these numbers.
Following is what you might qualify for depending on your current debt load.
|Annual Income||Monthly Debt||Max House Payment||Max Home Price|
Related: Buying a Home With Zero Down Payment
Maximum home price by down payment
Your down payment dramatically affects affordability.
For one, your loan balance drops when you put more down, resulting in a lower monthly payment. Additionally, you pay less mortgage insurance.
|Annual Income||Down Payment||Monthly Payment||Home Price|
*Your maximum FHA home price is higher due to more lenient DTI standards.
Maximum home price by interest rate
Interest rate is another significant determiner of your maximum home price. If rates drop, it’s a great time to enter your home search.
|Annual Income||Interest Rate||Monthly Payment||Home Price|
Maximum home price by desired debt-to-income level
While many financial gurus suggest you have a debt-to-income of 25% or less, it’s unrealistic in most markets. Pushing your front-end (housing) DTI from 25% to 36% increases your buying power by $185,000.
|Annual Income||DTI||Max Payment||Home Price|
Ways to increase your buying power
Here are ways to qualify for a bigger home price.
Adjustable-rate mortgage (ARM): As seen above, reducing your rate from 7% to 6% can increase your buying power by $45,000 at your income level. An ARM gives you a fixed rate for a few years while you wait for a chance to refinance or increase your income to afford a potentially higher payment later.
Avoid HOAs. HOA dues can cut your buying power by $50,000 or more. Avoid condos and homes in HOAs if possible.
Put more down or get gift funds. The lower your mortgage balance, the lower your payment will be. Try to find down payment assistance (DPA) programs or get a gift from family to reduce your loan amount.
Use FHA. These loans are lenient on debt-to-income ratios. Conventional loans allow a DTI up to 45% including all debts and total housing payment (50% in select cases). FHA’s max is 56.9% for well-qualified buyers.
Pay off debt: Paying off a $500 car payment can increase your buying power by $70,000.
You may be able to afford a $470,000 home with a mortgage of $446,500 and a total monthly PITI payment of $3,600 which is 36% of your monthly gross income. Your maximum loan amount depends on your debts, interest rate, property taxes, homeowner’s insurance, HOA dues, loan program, and payment comfort level.
Reducing your debt payments by $500 per month can increase your maximum home price by about $70,000 if you make $120k per year.
You don’t need a high credit score. An FHA loan requires just a 580 score and conventional, just 620. However, a higher credit score will help you qualify for a larger loan with better terms.
You can afford a decent home with a $120,000 salary in many areas
You may have been told that you can’t buy a decent home on $120,000 per year. But if you use creative financing for homeownership and are committed to becoming a homeowner, you can very likely make it happen.
All calculations assume a 5% down conventional loan at 7%, $350/mo property taxes and $100/mo insurance, MGIC mortgage insurance factors, 740 credit score, no HOA, $900 or less in monthly debt payments. Your rate and costs will vary.