How Much Income Do You Need To Buy a $500K Home?
Written by
Jordan Rosenfeld
Edited by
Chris Cluff
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For most people, a home is the biggest purchase they will ever make. According to a 2023 GOBankingRates survey, 18% of homeowners spent $550,000 or more on their homes, and another 9% paid $400,000 or more.
If you set out to buy a home with an asking price of $500,000, it’s important to know that you make enough income to truly afford it. While on paper you may qualify for the mortgage, there are lots of other factors to consider when purchasing a home.
We asked real estate experts how much income you need to buy a $500,000 home, as well as to afford all the costs that are associated with it.
See the best places to buy a $500,000 home.
The Basics of What It Takes To Buy
Chuck Vanderstelt, licensed real estate broker and owner of the real estate website Quadwalls.com, explained that the amount of income needed to buy a $500,000 home is different for everyone because qualifying depends on several variables.
“First, the lender needs to total the monthly repayment costs, which include the principal return payment, interest, property taxes, homeowner insurance and private mortgage insurance, if applicable,” Vanderstelt said.
Secondly, the buyer needs to have a qualifying down payment, he said. “The minimum down payment percentage varies depending on the loan type.”
Lastly, the buyer needs to have a low enough debt-to-income ratio to afford the monthly repayment expenses.
“Lenders typically look for a back-end debt-to-income ratio less than 45%, but some will go as high as 50%,” Vanderstelt said. “The back-end debt-to-income ratio is the amount of your gross monthly income dedicated to paying your current debts plus the monthly cost of the home.”
What Do You Need To Make To Buy a $500,000 Home?
With all of that in mind, a homebuyer making a 20% down payment to secure a conventional 30-year mortgage at a 7% interest rate on a $500,000 home purchase would need to make $87,626 annually, Vanderstelt calculated.
“The $400,000 borrowed has a monthly repayment obligation of $2,661. I would advise calculating a 1.5% annual expense for taxes and insurance, which is $7,500 per year or $625 per month,” he explained. “This gives a monthly total of $3,286 — [which] is 45% of $7,302. That is how much monthly income the buyer would need to be qualified, translating to annual gross earnings of $87,626.”
Take Debt Into Consideration
The above scenario describes a person with no other debt, Vanderstelt warned.
“Indebtedness is what keeps many homebuyers from getting qualified or getting qualified for the home they want to buy,” he said. “The fact that debt-to-income maximums are a percentage causes every dollar of monthly indebtedness to be enlarged.”
He gives two examples of how debt can change your mortgage amount.
Holly Homebuyer with no debt wants to buy a home with a monthly repayment of $1,000. The lender will let the borrower go up to a 45% back-end debt-to-income ratio. Holly would need to make $2,222 per month because 45% of $2,222 is $1,000.
Howard Homebuyer wants to do the same thing, but he has a $300 monthly car payment. So, his debts with the house include $1,300 per month, which means $2,889 is the required gross monthly income. Howard needs to make $667 more per month to get approved for the same mortgage simply because he has a $300 monthly car payment.
Budgeting for the Costs of Homeownership
The costs of buying a home don’t end at a mortgage, Vanderstelt said.
“A homebuyer purchasing a typical home should be prepared for annual maintenance expenses between $2,500 and $4,500 annually,” he said.
Don’t Spend More Than This
Just because a lender will lend to you doesn’t mean you need to take out the highest loan amount you qualify for. According to James Heartquist, owner of Modern Property Solutions, “A common rule of thumb is to spend no more than 28% of your gross monthly income on housing costs and no more than 36% on total debt payments.”
He recommended online calculators and seeking preapproval by a lender to estimate how much you can afford to borrow and what your monthly payments would be.
“You can also use the 1% rule of thumb to budget for home maintenance, which means setting aside 1% of the home’s value every year for repair and replacement costs.”
Tips for the Current Housing Market
It’s important to keep in mind that the housing market today is still a seller’s market, meaning there are more buyers than sellers, which drives up the home prices and creates competition, Heartquist said.
With higher than usual mortgage rates as well, Heartquist called today “a challenging time to buy a home,” but he said there are still opportunities for buyers who are prepared, flexible and realistic.
“Some experts predict that the housing market will cool down in 2024, as the supply and demand balance out, the interest rates stabilize, and the affordability improves.”
If you’re in the financial position to buy a new home, you might just want to wait a little bit longer and save a little bit more money.
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