How much home you can get depends mainly on your mortgage. Understanding how much one can afford to pay for the home is vital during the buying process.
Location is everything if you’re looking at purchasing a $500,000 home. For example, $500k will get you a four-bedroom house in Montgomery, Alabama, or a two-bedroom home in San Diego, California.
But, how much do you have to make a year to afford a $500,000 house?
The answer depends on several factors beyond your salary. However, figuring out the income you need to get the home should not feel like a mission-impossible challenge. If you are looking for a 500,000 house, read on to learn more about your income and other factors.
How Much do You Have to Make a Year to Afford a 500000 house?
It is hard to determine how much income is needed for a $500K loan. But you can use simple calculations.
An excellent rule of thumb to follow is that the cost of your potential should not be over 2.5 to 3 times your annual salary ($500,000). The minimum salary needs to be between $166k – $200k to afford a $500k home or qualify for a $500k mortgage comfortably.
However, mortgage payment requirements vary widely and vary based on several factors. The calculation above should offer you a rough estimate of the mortgage you can afford.
Unfortunately, using triple your income as a standard does not always work when calculating how much house you can afford.
So, how much do you have to make a year to afford a $500,000 house?
According to this mortgage required income calculator, you need an annual income of about $93,289 as long as you pay a $100,000 down payment and the interest rate is 4.5%. The projected gross monthly income is $2,176.74.
Calculating Income Required for a $500k Mortgage
Mortgage lenders are conservative when considering what is affordable for a borrower. They have to because they want to make sure you can repay the home loan.
A lender not only considers the mortgage payments but also looks at other debts taking a bite from your monthly paychecks.
The process comes down to finding out the Debt-To-Income (DTI) ratio. DTI is a percentage of total debt payments from your pre-tax income. The rule of thumb is to ensure your DTI is not over 36% of your monthly pre-tax income on obligations such as debt payments.
Some lenders may consider if you have a high DTI. However, you will be subject to more financial scrutiny.
Lenders will look at what makes up the mortgage payment, including homeowner’s insurance, property taxes, mortgage insurance (where applicable), and Homeowners Association (HOA) fees.
Other items included in DTI include:
- Minimum credit card payments
- Student loans
- Child support
- Auto loans
- Installment loans
- Other compulsory monthly debt payments
However, DTI does not include recurring monthly charges such as internet service, satellite or cable TV, mobile phone charges, and utilities.
To calculate if you have the income to get a mortgage, lenders use the formula below:
(Projected monthly mortgage payment + expenses on credit cards and other loans + legal monthly obligations)/monthly income
You are in good shape if you score less than 36%. However, other factors also come into play when getting a $500,000 mortgage.
8 Factors Affecting Affordability of a 500k House
Here are eight critical factors that impact your mortgage.
Individuals with high credit scores receive lower interest rates compared to those with low scores. A lender uses the credit score to determine your reliability.
Before you shop for a 500k mortgage, make sure you check your credit report and review it for errors. An error can cause a low score, which prevents you from qualifying for good loan rates and terms. Resolving errors on credit reports can take some time, so check early.
Location of the Home
Lenders will offer slightly different interest rates depending on the location of your home. Further, properties in rural areas attract different rates compared to properties in urban areas.
Regardless of whether the house is in an urban or rural area, consult different lenders to understand all the options available.
Home Price and Loan Amount
Homebuyers may pay high-interest rates on particularly small or large loans. The amount you are borrowing for the mortgage loan includes:
(Home price + closing costs)—down payment
Mortgage insurance and closing costs may be in the amount of the mortgage loan, depending on your circumstances and the product you are picking.
The Down Payment
A large down payment helps lower the interest rate because you represent a lower level of risk to the lender. Consider putting down at least 20% or more down, if you are comfortable, for a lower interest rate.
So, you will need to have $100,000 to put down when purchasing a $500,000 home. Some lenders may accept 15% ($75,000) or even 10% ($50,000) depending on your situation and credit score.
You need to purchase Private Mortgage Insurance (PMI) if you are putting down anything less than 20%.
Private Mortgage Insurance on a 500k Home
PMI depends on the loan terms and your down payment. However, plan for at least between $200 through $600 on top of the monthly mortgage.
Paying a small down payment may save you some money today, but you end up spending more money monthly than you should put into paying off the house.
Mortgage Payment Duration
The duration of your home loan is how long you have to repay it.
A shorter term attracts low-interest rates and overall costs but high monthly payments. A lot depends on how much lower the amount you are paying in interest and how much higher the monthly payments might depend on the length of a loan.
Interest Rate Type
Fixed interest rates do not change, while adjustable rates have an initial fixed period that goes up or down each period depending on the market.
The initial interest rate is lower when you opt for an adjustable-rate loan, but it may increase in the future.
The lender decides which type of loan to offer, and each product has different eligibility requirements. Broad categories of mortgage loans include:
- Federal Housing Administration (FHA)—The government regulates and insures these loans for disbursement through private lenders. Down payments are as low as 3.5% ($17,500). You can also apply with a low credit score, but beware that the maximum loan amount varies by county.
- Conventional—These are loans the government does not guarantee. Borrowers paying less than 20% must account for the PMI.
- US Department of Agriculture (USDA)—These are loans for purchasing properties in rural areas. USDA loans offer zero down payments and are cheaper than FHA loans. However, the borrower needs to pay an upfront fee and ongoing mortgage insurance premiums.
- Department of Veterans Affairs (VA)—The loan program targets eligible current service members, veterans, and their surviving spouses. The VA guarantees the loans for distribution through private lenders. VA loans are available with low or even zero down payment.
Other Costs to Consider When Buying a $500,000 Home
Beyond the mortgage, here are other costs to consider when planning to purchase a house worth $500k.
Cost of Property Taxes
Apart from the mortgage, also consider other incidental homeownership costs. One of them is property taxes.
Property taxes differ based on the location you are buying the property. For example, you will pay the highest property taxes in New Jersey (2.13%) and Illinois (1.97%) while Hawaii (0.31%) and Alabama (037%) are on the lowest scale.
This means the total amount to dedicate to owning a 500k house for property taxes in each location is:
- New Jersey – $10,650
- Illinois – $9,850
- Alabama – $1,850
- Hawaii – $1,550
It is critical to insure each property you own. In case of damage to the home, the financial and emotional pain of rebuilding or re-installing contents can be difficult, tedious, and painful. A comprehensive home insurance policy spares you from the horror.
The national average home insurance cost is $3,519 for $500,000 in dwelling coverage. However, the amount you will pay depends on factors such as:
- Home characteristics include the year of construction, roof condition, and construction quality
- Location characteristics, including fire risk and property crime risk
- Deductible amount
- Claims history
Closing costs are third-party and lender fees you pay at the close of a real estate transaction. You pay the monies the day you sign off on all paperwork and get the keys to your new home.
The average closing costs are between 2% and 5% of the home’s price. So, you may pay $10,000 to $25,000 in a $500,000 home.
Closing costs include:
- Prorated property taxes, HOA fees, homeowners’ insurance
- Lender fees to cover services such as credit check, origination, and application
- Transfer tax
- Discount points
- Home inspection
- Real estate attorney fees
- Title search and insurance fees
Pre-approval for any home loan type means you will get an official loan estimate that includes all the closing costs. The document also clarifies costs you can shop around for and the non-negotiable items.
Utilities, Maintenance, and Repair Costs
Home utility expenses can mushroom into a larger big than you expect. The American average homeowner spends close to $400 monthly on utilities.
You also need to account for upcoming maintenance and repairs. As the new homeowner, you handle regular maintenance and repairs.
For a single-family residence, it may cost between 1% to 3% of the home’s value in maintenance and repair costs. The amount translates to $5,000 to $15,000 annually for a home worth $500,000.
It is an excellent idea to set up an emergency fund before you think of buying a $500k home. The fund will cover costly emergency repairs. Carrying out these repairs quickly helps avoid long-term damage to the property.
Moving is a cost, too. While you are choosing your next home and deciding what to pack, make a plan for expenses to ensure your budget is not lost in the shuffle.
Some less-obvious moving costs to consider include:
- Packing materials and equipment
- Additional fees for large items such as pianos
- Moving peak surcharges
- Cleaning costs of your current home
- Deposits, taxes, connection, and installation fees for utilities at your new home
- Snacks for the road and restocking the pantry and refrigerator
- Repair or replacement costs for items that get damaged during the move
- Tips for movers
- Self-storage rental costs for items you cannot carry during the move
Getting Accepted for a 500k Mortgage
As you calculate the income needed for 500k mortgage, work on how to improve your chances of getting pre-approval.
Here are three strategies that will help.
Organize Your Finances
Lenders will consider the following income sources:
- Salary—Straightforward when you are earning a regular monthly amount. But it is more difficult to prove for self-employed individuals or if part of the salary as commission, bonuses, or irregular work hours.
- Bonuses and overtime—Lenders require evidence from your employer to determine how much you get paid as an annual bonus or for working extra hours.
- Interest and dividends from investments—Lenders may look at regularly paying dividends as a stable income. However, they may ask for a letter from your accountant confirming the dividend arrangement.
Pay Off Existing Debts and Reduce Expenditure
Your current financial commitments are critical to lenders. So pay off any outstanding loans and finance arrangements to improve your chances of being accepted for a mortgage. However, make sure you can afford the debt repayment without sacrificing savings.
Your current bank statement is also another critical consideration. Consider trimming unnecessary spending for a few months. This strategy may benefit you in the eyes of the lender. Avoid purchasing big-budget items until after you get the mortgage approved.
Improve Your Credit Score
Check your credit report and ensure the information is current. Other strategies to improve the credit score quickly include:
- Paying bills on time
- Aiming for 30% or less credit utilization
- Reducing requests for new credit
- Deal with delinquencies and keep old accounts open
- Consolidating your debts
- Use credit monitoring services to track progress
The Bottom Line
So, how much do you have to make a year to afford a $500,000 house? You need to make over $93,289 or more annually, make a $100,000 down payment, have a high credit score, and have a 33% or less debt-to-income ratio.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.