What income do I need to afford a $550K house?

With a budget of $550,000, you’re in pretty comfortable homebuying territory. The median national home price in September was well below that at $394,300, according to the National Association of Realtors. But determining whether you can afford a $550,000 purchase is another matter. The answer depends on your income, the amount of your down payment, the interest rate on your mortgage loan and more.

Bankrate’s mortgage calculator can help you determine how much income is needed for a $550K home purchase. With a 20 percent down payment on a 30-year loan, assuming a 7 percent interest rate, your monthly principal and interest payment will be $2,927. That figure doesn’t account for such expenses as property taxes and home insurance premiums, though — to factor in these additional costs, which will vary depending on your location, let’s round it up to $3,500 per month. Annually, that amounts to $42,000 in mortgage payments.

As a general guideline, it’s often recommended to limit your housing expenditure to no more than about one-third of your income. And so, to determine approximately how much income you would need to afford a $550K home purchase, triple $42,000: You’d need an annual income of at least $126,000.

Keep in mind that these calculations do not include the large amount of savings you’d need first, to cover upfront closing costs and the down payment — 20 percent of $550,000 is $110,000, a significant amount to pay all at once.

Income to afford a $550K house

When it comes to buying a home and assessing how much of a mortgage payment you can comfortably afford, experts generally advise following a guideline called the 28/36 rule. It states that you should spend no more than 28 percent of your income on housing costs (a little less than a full third) and no more than 36 percent of your income on all of your debt payments, including housing.

Now, let’s apply that rule to an annual income of $126,000.

• A $126,000 salary breaks down to $10,500 per month.
• Limiting housing costs to 28 percent of your monthly income would cap your mortgage payments at $2,940.
• Limiting your total debt to 36 percent of your monthly income would cap your debt payments at $3,780 — giving you a $840 cushion to cover not just your full housing payment but also your credit card bills, car payments and any other debt you carry.

Bear in mind that this does not account for the ongoing costs of homeownership, such as utilities, property maintenance and the unexpected repairs that pop up from time to time. In addition, don’t forget to account for your location, which plays a significant role in home affordability. Your $550,000 will go a lot further in some markets than others, and there are a number of desirable areas across the country where median home prices are right on target for you. For example, September’s median home price in Salt Lake City, Utah, was $547,500, according to Redfin data, and in Austin, Texas, it was $548,800.

What factors determine how much you can afford?

Salary is merely one of many variables to consider when determining how much house you can afford. You’ll also want to keep the following factors in mind as you crunch the numbers:

• Down payment: The larger the down payment you have available, the more affordable your monthly mortgage bill will ultimately be. That’s because when you bring more money to the transaction upfront, you don’t need to borrow as much from a lender, thus reducing your monthly payments.
• Type of mortgage: You don’t necessarily need to pay a steep 20 percent down payment — there are plenty of loan options that require much less if you qualify, which lets you avoid having to bring such a significant amount of money to the table. However, putting down less means a bigger loan and more interest to be paid, so if you can swing the $110,000 for a 20 percent down payment, you’ll be better off long-term.
• Credit score: Your credit score is one of the most impactful aspects of your mortgage application. The higher your score, the lower the interest rate you’ll pay, which allows your homebuying dollars to go further and can save you thousands over the life of the loan.
• Loan-to-value and debt-to-income ratios: Lenders will look closely at your LTV, a measurement of the loan amount you’re seeking as compared to the value of the home you want to buy. Your DTI, which measures your total monthly debt against your gross monthly income — essentially the 36 of the 28/36 rule — will also be carefully scrutinized.
• Assistance programs: Across the country, there are down payment assistance programs that can help make a home purchase more affordable for those who qualify. Your high income may make you ineligible, but it varies by market so it’s worth checking. These types of programs, typically offered at the local, state and federal level, as well as by some banks, provide funding to help cover down payment and closing costs. And if you’re a first-time homebuyer, there are specific programs tailored to your needs as well.
  

Stay the course until you close

Once you begin the mortgage-application process, you’ll have to wait several weeks or longer for closing day to arrive. During this time, it’s important to remain financially disciplined and not make any major purchases or changes that could impact or decrease your credit profile. Lenders are looking for stability — if you switch jobs or apply for a bunch of new credit cards, for example, they could very well change their mind about approving your loan.

Having a trusted real estate agent by your side to help you navigate the homebuying process can make the experience far less stressful. An agent will help you negotiate the most competitive deal possible, ensure that the paperwork is in order and make sure there are no hiccups as you proceed through closing.

FAQs

• How much are monthly payments on a $550K house?

  According to Bankrate’s mortgage calculator, assuming you bring a 20 percent down payment to the table and take out a 30-year loan at a 7 percent interest rate, your monthly principal and interest payments on a $550K home will be $2,927. But once you include such expenses as property taxes and home insurance, which vary widely depending on where you’re located, the total monthly payment might be closer to $3,500.
  

• What salary do I need to afford a $550K house?

  Following the commonly used 28/36 rule, which states that your housing costs should not exceed about a third, or 28 percent, of your income, you’d need to earn at least $126,000 a year to comfortably afford a $550,000 home. But don’t forget that there are also upfront costs to consider, like closing costs and a down payment — a 20 percent down payment on a $550K purchase is a significant $110,000.