In the market for a home and wondering, "How much house can I afford on $100k a year?" Use this guide to understand how buying power works and how much you may have.
When you earn a six-figure salary and are looking for a new home, your first question might be “How much house can I afford on $100k a year”?
An income of $100,000, which is higher than most other U.S. households, certainly allows you plenty of options for your dream home. But your price range depends on other factors, too, including credit score, down payment, interest rate, and debt-to-income ratio.
What determines how much house you can afford?
Lenders require you to show proof of income and typically verify your employment. They also factor in your creditworthiness and how many assets you have, such as savings and investment accounts that can go toward your down payment.
But you can get a ballpark idea by plugging your income, down payment, and other details into a home affordability calculator like the one below.
Here are factors that determine how much home you can afford on $100,000 a year.
Lenders ask for proof of income as a way to ensure borrowers can afford their monthly mortgage payments. Typically, they will want to see that there is a two-year history of that income and that it will likely continue for the foreseeable future.
There are several types of income that you can use to qualify for a mortgage, and you can use a combination of these when you apply:
- Employee wages are income earned from a salaried or hourly job. You’ll likely be asked to provide W-2s and pay stubs as proof of income. Lenders may also request a verification of employment (VOE), which shows that you are currently employed
- Self-employment income requires documentation such as tax returns, profit and loss statements, or bank statements. If you have a lot of write-offs, your qualifying income may be lower than you think. Lenders can only use your income after expenses to qualify you for the mortgage
- Investment income and dividends from assets such as stocks, bonds, or real estate can be used to qualify. You’ll need to provide statements from these accounts and tax returns as proof that you’ve received them for at least two years
- Disability benefits can be used to qualify for a mortgage if you’re unable to work. Your lender may ask for documentation of Social Security Disability Insurance benefits or a copy of a disability insurance policy, if you are receiving income from one
- Social Security income can also be used to qualify for a mortgage loan. Social Security award letters, bank statements, and tax returns will show the amount received
Other types of income that you can use to get a mortgage include child support, spousal support, alimony, rental property income, commissions, bonuses, and overtime pay.
How much house you can afford on $100k also depends on how much debt you currently have, including auto loans, student loans, credit cards, and other loans.
You want to keep your debt payments as low as possible. A $500 car payment can reduce your buying power by over $60,000.
Lenders calculate your debt-to-income (DTI) ratio to determine how much of a mortgage payment you can afford alongside your other debts and expenses.
You can calculate your DTI by dividing your gross monthly income (income before taxes) by your monthly debts.
But here’s something important to note. There are two types of DTI – front-end DTI and back-end DTI.
- Front-end DTI is your monthly housing payment vs your income
- Back-end DTI is your total monthly debts (housing + other debts) vs your income
Front-end DTI example
A $100,000 a year salary breaks down to $8,333 a month before taxes.
- Gross monthly income = $8,333
- Principal and interest payment = $1,250
- Property taxes = $250
- Property insurance = $50
This borrower’s total monthly housing cost equals $1,550.
$1,550 (housing expenses) ÷ $8,333 (gross monthly income) = 19% front-end DTI
Back-end DTI example
Your back-end DTI is the number your lender will calculate when you get preapproved.
They need to ensure that you can afford all of your monthly debt payments because if you are stretched too thin, there’s a higher risk that you will default on your mortgage loan.
Let’s assume that your monthly income and your housing payment are the same as in the above example. But now we’ll add in other possible debts:
- Monthly credit card payment = $50
- Monthly student loan payment = $500
- Monthly car payment = $350
Your total monthly debts, including your mortgage payment, are $2,450.
$2,450 (total monthly debt payments) ÷ $8,333 (gross monthly income) = 29% back-end DTI
Your DTI will increase or decrease based on the home you want to buy.
The maximum back-end DTI guidelines vary based by loan program:
Even if your DTI is higher than these recommendations, it’s still worth applying for a mortgage. In some cases, lenders can approve borrowers who have higher DTIs if they are otherwise creditworthy.
How student loans affect your DTI
Lenders must factor your student loans into your DTI. However, recent changes to loan program guidelines allow them to use your actual monthly payment amount if you are on an income-based repayment plan. Previously, they had to use a percentage of your total loan balance, which for many borrowers is higher than their monthly payments on an IBR plan.
Medical professionals, even recent graduates, may qualify for a 100% financing physician loan based on your projected income, even if you have a large student loan debt.
The more money you can put down on your new home, the more house you can afford. Here are a few reasons why your down payment amount influences your home budget:
- A larger down payment reduces how much you’ll need to borrow. When you borrow less, your monthly payment will be lower
- Putting more down on a home can help you snag a lower interest rate. Lenders typically offer more competitive interest rates when they’re taking on less risk
- A down payment of at least 20% helps you avoid paying private mortgage insurance (PMI), which runs about 0.5% to 1.5% of the loan amount each year
But if you can’t put down 20%, PMI isn’t a bad thing. Mortgage insurance enables you to buy a home sooner with much less money down. The earlier you buy, the more time you have for the home to gain equity, which is key for long-term wealth building.
Lenders consider individuals with higher credit scores to be lower-risk borrowers. That gives them more opportunities to qualify for mortgages with great terms, such as a lower interest rate and higher loan amount.
Several factors impact credit score including paying bills on time, amount of debt, credit mix, and credit history.
The minimum credit score to get a mortgage varies by lender and the type of mortgage product you’re attempting to qualify for.
- Conventional loans: 620
- FHA loans: 580 with a 3.5% down payment; 500 with a 10% down payment
- VA loans: 580
- USDA loans: 640 (some lenders allow a lower score)
It's important to know your credit score to see how much house you can afford on $100k a year.
Mortgage interest rate and loan terms
The mortgage rate and loan terms that you’re offered depend on your financial situation, and this can drastically affect how much you can spend on a home.
A 1% difference in a mortgage rate can add up to tens of thousands over the life of your loan. Opting for a 15-year term vs 30 years could mean paying less over time, but it could result in a higher monthly payment.
Borrowers with a low DTI, excellent credit score, and high down payment will likely receive the most competitive terms and interest rates, which affects how much house they can afford on $100k a year.
What your monthly mortgage payment includes
Once you get approved for a mortgage, you’ll find out what your monthly payment will be. Mortgage payments consist of four parts:
- Principal. This is the amount that you borrow to purchase the home, and it’s paid off over the life of the loan
- Interest. This is the percentage that you pay to the mortgage lender in exchange for lending you the money. The interest amount you pay decreases over the life of the loan as you pay down the principal
- Taxes. Homeowners are required to pay property taxes, which are based on a percentage of the property value. Taxes vary from place to place and may change every year
- Insurance. Lenders require homeowners insurance to protect your home. You may also owe mortgage insurance, depending on your down payment amount and the type of loan you’re using to buy the home
If you buy a home in a community with a homeowners association (HOA), those fees will also be factored into your monthly mortgage payment. All of these thing will impact how much house you can afford on $100k a year.
How to increase your home affordability
You can take some steps to improve your financial situation so that you can afford to spend more on a home. These tips can help you increase your homebuying budget:
- Raise your credit score. Paying bills on time, paying down your debt balances, keeping credit accounts open, reviewing your credit report regularly, and disputing errors on the report can help improve your credit score
- Save more money. The more you can put down on a home, the more favorable the loan terms. Focusing on saving up for a larger down payment can increase your home affordability
- Pay down debt. If you have higher interest debt, such as credit card bills or auto loans, paying these down may help you toward your homebuying goal. Focus on debts with the highest payments first
- Search for homes in lower-cost areas. Home prices vary across the country. So do property taxes. Looking for homes in less-expensive areas with lower taxes or no HOA duesmight mean you can get a larger house for less
- Shop around for the best mortgage lender. Different lenders offer different loan products with different requirements and terms. Shop around and get pre-approved with multiple lenders to see which one is the best fit for you
Working on one or more of these things can help you afford more house on a $100k salary.
Start house hunting
Earning $100,000 a year can put you in a strong position to buy a home. But lenders look at more than just income to make your homebuying dreams come true.
When considering how much house you can afford, also think about how much you have saved for a down payment, how high your credit score is, and how much debt you have. You can take steps to improve these elements of your finances and increase your home affordability.
- Home affordability is based on more than just your income
- Having a six-figure income helps, but your credit score, debt-to-income ratio, down payment, and interest rate play a role as well
- Saving as much as you can and maintaining good credit before buying a home can help you maximize your home affordability