How Much Do You Need to Earn to Buy a $400K Home?

One challenging aspect of purchasing a home is trying to figure out the financial side of things. You probably have two big questions: “How much do I qualify to borrow?” and “How much can I afford?”

To help you work your way through these calculations, let’s go over an example, plus some additional things to factor in when you do your math.

Mortgage Qualification: A Quick Example

Here is the example we gave in this short video:

Say you want to buy a $400,000 home with 5% down and a conventional mortgage. Below is an example of what your expected monthly housing payment and other debts could look like:

• Principal and interest: $2,278
• Property taxes: $400
• Homeowners insurance: $150
• Mortgage insurance: $79

Total housing payment: $2,907

Now, add your other monthly debt payments:

• Car payment: $500
• Credit cards: $200
• Student loans: $250

Total monthly debt: $3,857

As a general guideline, your total monthly debt payments should be under about half of your gross income, though the exact limit varies by loan program, and FHA and VA loans often allow somewhat higher.

Using that general guideline, you would need a gross monthly income of roughly $7,700.

Multiply that by 12 months, and you get:

Approximately $92,500 a year

In other words, an annual income of around $92,500 could put you in the range needed to qualify in this example. Your actual qualification will depend on factors such as your loan program, credit profile, debts, assets, and other financial circumstances.

Additional Financial Costs of Homeownership

The calculation above gives you an idea of what a lender may determine you can afford. But you also need to do some additional math to make sure you really can afford the home.

Let’s continue based on the example above.

Say you earn about $7,700 in gross income each month, and $3,857 of that is going toward your housing payment and other monthly debts.

That leaves $3,843.

Remember, however, that $7,700 is gross income, meaning it is before taxes.

Depending on your filing status and withholding, federal and state income taxes might be roughly $1,600 to $1,900 a month.

For purposes of illustrating the rest of our example, let’s use roughly $1,750 per month. That would leave you with approximately:

$2,093 a month

You’ll need to account for a few more housing expenses as well. Here are some example numbers:

• Utilities: $250
• Maintenance and repairs: $300

These are just estimates for one possible scenario, but they give you an idea of how the math could play out.

That is another $550 a month, bringing the amount remaining to approximately:

$1,543 a month

Other Expenses to Consider

After all the expenses above are taken care of, you will probably have plenty of additional costs. These might include things like:

• Food: $800
• Household supplies: $50
• Gas: $100
• Health insurance: $800
• Auto insurance: $100

Those expenses total another $1,850 per month.

That means, in this example, the buyer would be roughly $300 over budget each month.

And that still does not account for unexpected expenses, such as sudden auto repairs or medical bills.

We also have not accounted for childcare expenses, if applicable, savings, investments, and other financial goals. There is no room in this example for leisure expenses, either. Life tends to involve miscellaneous costs each month that can be unpredictable or difficult to fit neatly into a category.

Some people may have other regular bills as well. For instance, you might have monthly healthcare expenses beyond the cost of your insurance, or perhaps you have pet care costs.

Always Do the Math

The lesson here is twofold.

First, it is critical to do your own math. If a lender tells you that you are approved to borrow enough money to buy a $400,000 home, that is great. But the only way to know whether you really can afford that home is to calculate a comprehensive and realistic budget.

Second, it is very easy to overestimate what you can afford. Owning a home involves more costs than people sometimes realize at a glance. Plus, it is easy to forget about regular life expenses that a lender may not consider when determining how much you qualify to borrow.

You need to pay for things every month that are not part of your debt load.

So, calculate what will comfortably fit within your budget while still giving you room to make progress toward your other life goals, such as raising a family, building savings, or preparing for retirement.

Maybe you are approved to buy a $400,000 home but decide instead to buy a $350,000 home, for example. Choosing a lower purchase price could give you more breathing room in your monthly budget.

The important thing is understanding both numbers: what you qualify for and what you can comfortably afford.

Buy a Home in Missouri or Elsewhere

Now you know more about calculating how much home you can afford.

McGowan Mortgages can help you buy a home or refinance in Missouri and 40+ other states. During your consultation, we can go over your budget in detail and help you understand both how much you may qualify to borrow and what you can realistically afford.

To get started, please give us a call at (816) 631-9687 to schedule your consultation.