At $54,000 north of the national median household income, a $125,000 salary can buy you one of the best houses in town in some markets — or even be enough to squeeze into the priciest cities in America.
But just because $125,000 is a prestigious salary, you don’t have to shop for prestige housing.
“At this income level, considerations may include future plans, like starting a family, which would influence the size and location of the home,” said Shri Ganeshram, CEO of real estate investing platform Awning.com. “Someone earning this much might also be considering factors like school districts or proximity to work, which could affect the affordability of properties.”
You Get To Say the Word ‘Million’ When Talking About Your House
A simple and highly generalized mortgage calculator shows that a homebuyer with a $125,000 salary has a purchase budget of exactly a half-million bucks.
“If you make $125,000 you will be able to afford a home worth around $500,000,” said David Sayce, founder and director of Compare My Move.
But before you imagine yourself trimming the rose bushes in front of your McMansion, keep in mind that those calculations presume the most ideal circumstances: 6.5% interest, very good credit, just $500 in monthly debts and a $100,000 down payment.
The gross monthly income for a $125,000 annual salary is $10,417 — and that’s the number that will determine how much money you can borrow and how much home you can afford.
Bruce Ailion, attorney, realtor and president of the RE/MAX Ailion Team, explained that lenders don’t issue loans based on how your annual salary stacks up against the cost of the house you want to buy. They issue loans based on your debt-to-income (DTI) ratio and how much room it leaves for another monthly obligation.
The bank starts by issuing an interest rate based on your risk profile and the information in your credit report.
“Generally, a lender looks at several factors to determine the interest rate you will pay,” said Ailion. “These include your credit score, down payment, and other factors.”
Once the bank settles on an interest rate, it combines that with all the other monthly expenses associated with homeownership.
“These include property taxes, HOA expenses, mortgage insurance, and property insurance,” said Ailion.
From there, the bank tallies your existing monthly obligations to other creditors so it knows how much you’re capable of paying back — that includes credit cards, car payments, student loans, alimony, child support and just about everything else that appears on your credit report.
“Generally, a lender will not make a loan that puts your total debt payments above 43% of your monthly pre-tax income,” said Ailion.
According to Travis Wells, a real estate investor, broker and owner of Exclusive Housing, most lenders prefer DTIs of 36% or less, even if 43% is the absolute cutoff. They also like to see total housing costs of less than 30%. Therefore, he advises using the 28/36 rule, which allocates 28% of your gross monthly income for your mortgage payment and 36% for your non-housing debt.
- 28% of $125,000 is $35,000. Divided by 12, that’s $2,916 per month for your mortgage.
- 36% of $125,000 is $45,000, or $3,750 per month for non-housing debt.
If housing comprised the full 30% instead of 28%, you could technically afford $3,125 per month, but Wells cautions against pushing the upper limits of what you can afford. Remember, you don’t need to borrow every dollar the bank is willing to loan.
“If a potential buyer wanted to be conservative, a 22%-25% income-to-mortgage payment could be used, or even less,” said Wells.
Realtors might be very impressed with your ability to cover a $3,000 monthly mortgage payment for a $500,000 home — or, depending on the location, they might not return your calls.
“$500,000 may seem like a lot of money to buy a home with, but the average house price in New York City is more than $600,000,” said Sayce. “On the other end of the scale, the average home in Jackson, Mississippi is just over $68,000.”
Sticking with Sayce’s examples for context as to just how much location matters, $500,000 in Jackson can buy you a newly renovated 4,140-square-foot, five-bedroom, five-bathroom home on an acre of land in a gated community with a four-car garage that includes 600 extra square feet of separate living quarters.
On West 70th Street in Manhattan, the same $500,000 is good for a 400-square-foot studio apartment — that’s one-third less space than you’d have as a guest sleeping in the garage quarters in Jackson.
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