Have you been wondering how far your salary will take you when it comes to buying a home? Were you casually scrolling through Zillow or Realtor, only to accidentally find the home of your dreams? And did that gorgeous dream house come with a $700,000 price tag, which now has you asking, “do I make enough money to buy that?”. We’ve got your answer below.
While many factors come into play when determining the affordability of a home, in general, a $700,000 house requires a gross income of $233,333.
Most financial experts agree that you should not spend more than thirty percent (30%) of your gross monthly income on a mortgage payment. It’s also a good idea to avoid purchasing properties that cost more than three times your annual salary, which is where the quick estimate of a $233,333 salary needed for a $700,000 house comes from.
Are you ready to deep dive into the nitty-gritty details of how much money you need to afford that gorgeous home? Read on; we have a lot more to share with you.
What is the Monthly Mortgage Payment for a $700,000 House?
Your mortgage payment is based on a few factors:
- How much the home costs
- Your credit score
- The size of your down payment
- Your home loan’s term
- MCLR rates
- The type of interest used
- Your income’s stability
- Your income ratio
- The LTV ratio
How Much The Home Costs
For our example, $700,000 is an easy number to use. This piece of the puzzle is nice and easy.
Remember, $700k is not the maximum purchase price; it is just the beginning. Buying a home comes with a slew of other financial obligations, such as homeowners insurance, property taxes, HOA dues, maintenance, repairs, and more. Your monthly mortgage payment may or may not also contain your property tax and monthly PMI.
In addition to your down payment, you will also need cash for closing costs, title transfer fees, and more.
Your Credit Score
The higher your credit score, the more favorable your mortgage interest rate (and, therefore, the mortgage itself) will be for you.
A score that is 740 points or more is usually called Excellent.
A score ranging between 700 and 739 is Good.
A score between 630 and 699 points is Fair.
Finally, a score that is 629 or fewer points is Poor.
As of February 11th, 2022, the average mortgage interest rate is 3.885% for conventional 30-year fixed-rate mortgages and 3.016% for 15-year fixed-rate mortgages.
According to myFICO, the following credit scores usually result in the following annual percentage rates (APR):
- 760 to 850 credit scores usually get a 3.5% APR.
- 700 to 759 credit scores get a 3.7% APR.
- 680 to 699 credit scores get a 3.9% APR.
- 660 to 679 credit scores get a 4.1% APR.
- 640 to 659 credit scores get a 4.5% APR.
- 620 to 639 credit scores get a 5.1% APR.
If you have a 760 to 850 credit score on a $700,000 home with a thirty-year fixed-rate mortgage, you could expect to pay $3,148 every month. For a 15-year fixed-rate mortgage, it would be $5,009 every month.
If you have a 620 to 639 credit score on the same $700,000 home with a thirty-year fixed-rate mortgage, you could expect to pay $3,802 every month. For a 15-year fixed-rate mortgage, it would be $5,573 every month.
The difference between the excellent credit score and the poor credit score over thirty years would be an additional $235,440 in interest. $1,133,280 would be paid over 30 years with excellent; 1,368,720 would be paid over 30 years for poor credit.
The difference between the excellent credit score and the poor credit score over fifteen years would be an additional $101,520. This is because $901,620 would be paid over 15 years with excellent; $1,003,140 would be paid over 15 years for poor credit.
The Size of the Down Payment
Down payments can be a bit controversial.
On one hand, having a larger down payment means that you will pay less for the home in total. If the downpayment exceeds 20% of the home, you will not need to pay PMI; that’s private mortgage insurance, which is a significant chunk of money saved over the course of your mortgage.
On the other hand, inflation is rising quicker than the average home APR (as of February 2022). This means that if it took you three years to save up $140,000 and the annual inflation rate is 7.5%, then that $140k only has the purchasing power of $108,500.
During times of excessive inflation, it is a better financial decision to purchase a home with a smaller down payment. You can get a home loan with only a 3.5% down payment.
Look into FHA loans if a smaller down payment is something that you are interested in. FHA loans are private loans that are backed by the Federal Housing Administration (FHA). The purpose is to allow people with lower income and lower credit scores to still afford to buy a house.
How much money you use for your down payment is a personal decision.
Just keep in mind that you want some cash (or liquid assets) leftover to cover you in case of job loss, home breakdowns, or other life emergencies. If you don’t plan to move into your new home right away, be sure to keep enough cash tucked away to cover your remaining rent payment (or rent payments), moving costs, any new furniture or renovations you want for your new home, your upcoming homeowner’s insurance payments, utilities, and of course, cash to cover your first few mortgage payments.
You’ll also want to keep healthy savings account in general. You may be surprised to see how much house maintenance can be.
When you pay rent, rent is the ceiling of what you pay. If you cover your rent payment, the taxes, HOA dues, maintenance, and repairs are covered. When you buy a house, the mortgage is the floor. You are guaranteed to have to pay that monthly mortgage payment, and you are still responsible for the property taxes, HOA fees, maintenance, repairs, and more.
Also, shop around for a home insurance provider as you look for your home. Yes, you likely had to pay renter’s insurance, but it is usually cheaper than homeowner’s insurance. Shop around and do your due diligence.
Ultimately, how much leftover cash you have after making your downpayment is completely up to you and your personal savings goals.
Your Home Loan’s Term
As shown in the credit score section, the loan terms have a significant impact on the size of your monthly mortgage payment as well as the total interest paid.
If you opt for a fifteen-year mortgage, you will pay less in interest but will be responsible for larger mortgage payments every month.
Choosing a thirty-year mortgage does mean you will likely pay more in APR interest, but you will not be responsible for such a large monthly payment.
My belief is that it is better to sign up for a thirty-year mortgage and then make fifteen-year-sized monthly payments. If you happen to get injured, lose your job, or face any other financial hardship, you are not forced to pay such a steep payment during the tough times. When things are good, you can double your payments as if you were paying a fifteen-year mortgage payment and knock off lots of hefty interest.
However, this is a personal decision, and you know what the best option for you and your family’s situation is.
MCLR stands for Marginal Cost of Funds based Lending Rate.
This rate has nothing to do with you personally and everything to do with the current economy. More specifically, it is based on the cash reserve ratio, tenor premium, operating costs, and of course, the marginal cost of funds. If you do not use a fixed-rate loan, your interest rate will increase or decrease based on this rate.
The Type of Interest Used
You have three options when it comes to interest: fixed rate, floating rate, and mixed rate.
Fixed rates are locked-in rates that do not fluctuate (unless you want to refinance the loan balance because of more favorable interest rates later on).
Floating rates are not locked in and are affected by the MCLR.
Mixed rates start off the loan as fixed but change over to floating after a specified period of time.
Your Income Stability
The higher your household income is, and the longer you have been consistently earning your current pre-tax income, the better your mortgage loan will be. Lenders like to see stable, consistent income that is not likely to be affected in the future. Because of this, two-income households can have their benefits, as do buyers with successful cosigners.
For that $700k mortgage, it would be best if you made at least $233,333 a year for at least the past three years. The higher your monthly take-home pay is, the better. And the longer you have kept a quality job with the steady income needed, the better.
Your Income Ratio
Your income ratio is a big factor in this.
Really, you shouldn’t be asking, “how much salary to afford $700k house”? But instead, “how much money do I need to afford that $700k mortgage AND all my other financial responsibilities?”.
Your debt to income ratio refers to how much money you make versus how many debt payments you owe.
Credit card payments, your car loan (or car loans), student debt, child support, other forms of debt, and general spending habits are all factors that your lender will take into consideration.
If you don’t have monthly debt payments and make $233,333 in annual income or more, you can afford a 700k mortgage payment. If, however, you have a comparable income, but have existing debt, say $300 a month for credit card payments, $250 in child support, and have a $600 car loan, you are not likely to get approved for a mortgage, or you will at least have unfavorable monthly payments thanks to the higher APR.
If you have $1,150 in monthly debt payments, you will likely need to make an additional $13,800 annual income to cover the difference for your $700k mortgage. That would mean you need a gross annual income of $247,133 or a gross monthly income of $20,594 to afford a $700k mortgage.
How much house you can afford depends less on your gross monthly income and more on how much income you keep every month by not having high debt obligations.
The LTV Ratio
LTV stands for Loan-to-Value. For this, a larger home loan requires higher interest rates because it is a larger risk for the loan program or lender.
If you are worried about having a higher LTV, speak to your licensed mortgage broker about applying for an FHA loan. Generally speaking, an FHA loan is more forgiving of smaller down payments (and lower credit scores). There are so many options out there so be sure to explore as many as you can.
There are so many variables that play into how much house you can afford.
It would be wise to speak to a licensed mortgage broker, or at least use an affordability calculator to get a good overview of your financial information. The more you know, the better you can prepare for your loan, the monthly mortgage payments, and the true joy that is becoming a brand new homeowner.