Can You Even Afford to Buy a Home With a $100K Salary?

CNET

a day ago

Tharon Green/CNET
In today's expensive housing market, it's not a mystery why someone making $100,000 a year would see homeownership as out of reach.
With more than two decades as a real estate professional, I tell my clients to be honest about what fits their financial reality, not just the bank's formulas. Unless you're buying a home with cash (unlikely), it's valid to ask if you can afford to take out a mortgage on an above-average salary.
Let's start by making a key distinction. The amount you borrow for your home loan and the amount you qualify for are different. Although a lender may approve you for a large loan, that doesn't mean it's a smart financial move for your life or budget.
The key is understanding how much you can borrow, your monthly budget and home prices in your local market, not just nationally. You'll also need to understand debt-to-income ratios and what goes into your mortgage payment beyond your interest rate alone.
What is gross salary vs. disposable income?
If you earn $100,000 per year, that breaks down to $8,333 per month in gross income. Lenders will use your monthly gross income when calculating how much house you qualify for.
This figure doesn't reflect what you actually take home. Your net pay is closer to $6,561 per month, depending on your specific tax deductions and benefits.
When budgeting for homeownership, look at your disposable income, i.e., the amount of money you have available for spending, saving or investing after all mandatory deductions and taxes have been subtracted.
Mortgage lenders don't factor in what you spend on groceries, child care or your car lease, either. Their math is entirely based on your gross pay, which can make your budget look stronger than it actually feels.
What kind of mortgage makes sense, conventional or FHA?
Most first-time buyers use either a conventional loan or a Federal Housing Administration loan. The right option depends on your credit score, savings and long-term goals.
Conventional loans are best if you have good credit (typically 680 or higher) and can put down at least 5 to 20% upfront toward the home's purchase price. With a 20% down payment, you skip mortgage insurance and may qualify for a lower interest rate.
FHA loans let you qualify for a mortgage and buy a home with as little as 3.5% down and with a credit score as low as 580. These government-backed loans often have more favorable average interest rates than conventional loans but you'll have more fees to pay. FHA mortgages allow higher debt-to-income ratios, which makes them more flexible if you're pushing your budget. The trade-off with an FHA loan is being stuck with mortgage insurance premiums unless you refinance later.
Both loan types are common if you're starting your homeownership journey. It just depends on your personal situation and how much you can realistically afford to pay off in monthly mortgage debt. With a smaller down payment, you'll be taking out a larger loan with more debt to pay off over the long term.
Do you want to play it safe? Understand your risk tolerance
The safest approach when purchasing a home is to borrow less than you qualify for.
Many realtors recommend the 28/36 rule, a solid target for long-term financial stability. That means keeping your housing costs under 28% of your gross income and your total monthly debt under 36% of your gross income.
With $8,333 per month in gross income, that would cap your total monthly payment at $2,333.
More cautious buyers often follow the rule recommended by the personal finance author Dave Ramsey. Ramsey recommends keeping your mortgage at less than 25% of your take-home pay (not your gross income).
Looking at your net salary of $6,561 per month, that would cap your total monthly payment at $1,640 -- a tough number to hit unless mortgage rates are low, you have a large down payment or are buying in a low-cost market.
How much down payment can you make?
Your down payment percentage has a direct impact on your loan, monthly payment and whether you'll need mortgage insurance. Let's take a more detailed look at what this would mean for a $400,000 home, which is less than the average home sales price in the US.
Down payment on a $400,000 home:
FHA loan: 3.5% = $14,000 down payment
Conventional loan minimum: 5% = $20,000 down payment
Conventional without mortgage insurance: 20% = $80,000 down payment
A 20% down payment means lower monthly payments, no mortgage insurance and less debt and interest paid over time. It also increases your odds of getting your offer accepted in a competitive market. But if putting 20% down drains your savings, that's not the best move either. You still need reserves for closing costs, maintenance and emergencies.
What else goes into a monthly mortgage payment?
A mortgage payment is more than just the loan. Lenders often refer to PITI, which stands for principal, interest, taxes and insurance. Many homes also include HOA fees.
Here's what makes up your full monthly payment:
☑️ Principal: The amount you're paying off each month toward your mortgage loan balance.
☑️ Interest: The cost of borrowing, based on your mortgage interest rate. Average rates are currently in the 6.5% to 7% range and they're expected to be there for a while.
☑️ Property Taxes: Depending on your location, a good estimate is between 1% and 1.5% of your home's value annually, divided into monthly payments.
☑️ Homeowners insurance: Usually $100 to $150 per month, although this will vary a lot by region.
☑️ Mortgage insurance: If you put down less than 20%, this can add up to a few hundred dollars per month based on your down payment, credit score and the number of borrowers on the loan.
☑️ HOA Fees: Common in condos or planned communities, ranging from $100 to $500 or more.
Real example: An initial calculation for a $2,000 monthly mortgage payment might actually be closer to $2,700 to $3,000 when everything else is factored in. Always run the full numbers, not just the loan payment.
What is debt-to-income ratio?
Debt-to-income ratio, or DTI, is how lenders measure your ability to repay a loan. It's a simple formula: monthly debt payments divided by gross monthly income.
Two numbers matter. The front-end ratio is the percentage of your income that goes toward housing expenses only (mortgage payment, property taxes, insurance, etc.). The back-end ratio is the percentage that includes all monthly debts (from housing, credit cards, student loans, car payments, etc.).
Most conventional loans allow up to 49.99% on the back-end ratio, although many lenders aim lower. FHA loans are more flexible, with lenders often allowing DTIs above 50% if your credit and income support it.
Keep in mind that these are maximum limits. Just because you can borrow that much doesn't mean you should. A lower DTI gives you more breathing room in your monthly budget and can make life feel a lot less stressful after you move in.
Can I afford a $400,000 home with a $100,000 salary?
Over the years as a realtor, I've worked with buyers of varying financial backgrounds who find ways to buy a home, even in an unaffordable market.
My main advice is to remember that no home-buying budget is ever the same. Each household has different needs, expenses and financial padding.
Always look at the full picture, including other expenses, before you take out a mortgage. If you're stretching with a low down payment or have debt already, consider a less expensive home or a more affordable location.
In these instances below, your housing expenses will be about 40% or 50% of your take-home pay. It may look safe on paper but in real life, you will have little left over for anything else. At the same time, this might be manageable for some buyers who have minimal debt, a second stream of income or additional savings.
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Is it impossible to buy a home with a $65K salary?
Purchasing a home with a lower salary is definitely riskier and harder for most people. Your options will be limited by loan size and monthly debt caps. In most cases, you'll need a large down payment, a second income or family support to make it work.
In more affordable regions, you can still buy modest homes or condos with help from FHA loans or grant programs. But in places like California or New York, homeownership options will be very restricted without assistance.
Will home prices go down anytime soon?
While home prices may cool in some areas, a major drop is unlikely. Waiting for a price crash could mean missing out on the right home.
Housing inventory is still below pre-pandemic levels, with current homeowners holding tight to their cheaper mortgage rates. Demand for homes remains strong, maintaining the supply/demand imbalance and keeping prices elevated.
Do I really have to do the math?
Yes, you should always do the calculations but you don't have to do it alone.
Before you start home shopping, speak with a mortgage loan adviser. They'll help you understand exactly how much home you can afford based on your income, credit and debt. They'll also break down your full payment so there are no surprises.
Taking out a mortgage is one of the biggest commitments you'll make. Getting the numbers right, especially in a high-priced market and an unpredictable economy, helps you prepare for the costs of homeownership and avoid regret.