How Much Income You Need To Afford a $250K, $500K or $1M House

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Buying a house is a significant milestone that allows you to build equity with each monthly payment. It takes a while to save enough money for a down payment, but you also need sufficient income to cover monthly mortgage payments and your other living expenses.

While housing expenses, property taxes and other costs vary for each individual, the 28% rule is a good rule of thumb. This rule states that you shouldn’t spend more than 28% of your gross monthly income on your mortgage.

We will use this rule when determining how much income you need to afford a home.

How Much Do You Need To Buy a $250,000 House?

If you put 20% down and secure a 7.03% APR on a 30-year fixed mortgage, you’ll have a $1,335 monthly mortgage payment. Using the 28% rule, you need to earn $4,768 per month. That comes to $57,216 per year.

If you can only put 10% down, your monthly mortgage payment goes up to $1,501. You also have to contend with a $117 per month private mortgage insurance premium until you have 20% equity. Your monthly income must be $5,361 excluding PMI ($64,332 per year) or $5,779/mo with PMI ($69,348 per year).

A higher down payment makes the monthly payments more affordable and will provide some additional breathing room. However, it gets more difficult to make a 20% down payment as housing prices increase.

How Much Do You Need to Buy a $500,000 House?

If you make a 20% down payment on a $500,000 home with a 7.03% APR for a 30-year mortgage, you’ll end up with a $2,669 monthly mortgage payment. You’ll have to make $9,532 per month, or $114,384 per year, to afford the house. 

However, making a 20% down payment requires that you have $100,000 ready to go. It’s more likely to only make a 10% down payment, which comes to $50,000. If you make that down payment, your monthly mortgage payment goes up to $3,003. You’ll also be stuck with $234 in monthly private mortgage insurance (PMI) until you reach 20% equity in your home.

You’ll need to earn $10,725 per month, or $128,700 per year, excluding PMI. If you want to include PMI in your calculation, you’ll have to earn $11,561 per month or $138,732 per year. 

How Much Do You Need To Buy a $1 Million House?

You’ll need $200,000 in your bank account just to make a 20% down payment. If you have the funds to make that down payment, you’ll end up with a $5,339 per month mortgage payment for 30 years, assuming a 7.03% APR.

To keep up with the mortgage using the 28% rule, you should earn $19,068 per month. That comes to $228,816 per year. Homeowners who make a 10% down payment on a $1 million house end up with a $6,006 monthly mortgage payment plus $469 per month in PMI.

You would need to earn $21,450 per month to keep up with a $6,006 per month mortgage payment if you use the 28% rule. That comes to an annual income of $257,400. If you want to include PMI in your calculation, you must earn $23,125 per month, which comes to $277,500 per year.

How To Afford More House

These calculations made several assumptions. The first assumption is that you would receive a 7.03% APR over a 30-year fixed-rate mortgage. For instance, the mortgage on a $1 million property with a 20% down payment drops from $5,339 per month to $5,057 per month if you can secure a 6.50% APR.

Federal Reserve rate cuts will reduce the interest rate, but you can also end up with a lower rate by boosting your credit score. Making on-time payments and reducing your financial obligations will put you in a better position to buy a larger property.

You can also save more money and reduce your expenses so you can creep above the 28% rule’s designation. You can afford a bigger home if you opt for a 30% to 35% rule instead of a 28% rule. However, you’ll have to make some long-term cuts to your budget, since the 28% rule applies for the life of the mortgage.

Finally, you can pursue new income opportunities, such as a raise, job hopping or a side hustle. Boosting your income is the best way to afford a larger property. 

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