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How many years of salary should your house be worth?

Buying a house is one of the biggest financial decisions most people will make in their lifetime. With home prices continuing to rise in many markets across the country, it’s normal to wonder how much house you can realistically afford based on your income.

While there are no hard and fast rules, a general guideline is that your total housing costs should be no more than 28% of your gross monthly income. This includes your mortgage payment, property taxes, homeowners insurance, and any homeowners association fees. Going above 28% may stretch your budget too thin and make it difficult to save for other goals.

Another common rule of thumb is that your home should cost between 2 and 3 times your gross annual household income. But is this still realistic in today’s housing market where home prices have risen sharply? Let’s take a deeper look at the factors to consider when deciding how much house you can afford.

The 28% Rule

As mentioned above, financial experts often recommend keeping your total housing costs at or below 28% of your gross monthly income. This percentage ensures you have enough income left over to cover other necessary expenses like food, transportation, healthcare, and retirement savings. It also leaves room in your budget for discretionary spending and entertainment.

To calculate 28% of your income:

  • Add up your gross (pre-tax) monthly income from all sources such as your salary, bonuses, investment income, etc.
  • Multiply this number by 0.28. The result is 28% of your gross monthly income.
  • Your total housing costs per month including mortgage principal and interest, property taxes, homeowners insurance, and HOA fees should not exceed this number.

For example, if your gross monthly income is $6,000, you would multiply $6,000 by 0.28 to get $1,680. This means you should try to keep your total housing costs at or below $1,680 per month. Going above this 28% threshold means you may not have enough income leftover to cover other expenses and savings goals.

The Salary Multiplier Rule

The salary multiplier guideline says your home should cost between 2 and 3 times your gross annual household income. This takes into account that housing costs typically make up one of the largest shares of a household’s budget.

To find the salary multiplier range:

  • Add up your total gross annual income from your job, spouse’s income, and any other household income sources.
  • Multiply this number by 2 to get the low end of the range.
  • Multiply it by 3 to get the high end of the range.

For example, if your total gross annual household income is $100,000, you would multiply it by 2 and 3:

  • 2 x $100,000 = $200,000 (low end of range)
  • 3 x $100,000 = $300,000 (high end of range)

This means a home price between $200,000 and $300,000 would be considered affordable based on the 3x income rule of thumb. The lower end of 2x income allows for more room in your budget while the higher end of 3x income stretches your budget more.

Salary Multiplier by Age

Some financial experts also recommend tailoring the salary multiplier range based on your age:

Age Salary Multiplier Range
Under 30 1 – 2x Income
30-39 2 – 3x Income
40 and up 3 – 4x Income

The rationale is that younger buyers may not have saved up as large of a down payment yet. Older buyers closer to retirement age may be more established and able to afford higher housing costs relative to their income.

The 20% Down Payment Rule

Saving up at least a 20% down payment on a home is another budgeting guideline to consider. Putting down less than 20% will require you to pay private mortgage insurance (PMI).

Private mortgage insurance protects the lender in case you fail to repay your loan. It typically costs 0.5% to 1% of the total loan amount per year until you reach 20% equity in the home. On a $300,000 home loan, this could mean an extra $250 to $500 per month.

A 20% down payment can help you avoid PMI and also give you more equity in the home right away. This provides a buffer if home prices decline.

On a $300,000 home purchase, a 20% down payment would be $60,000. Saving up this amount takes discipline, but the benefit is avoiding potentially hundreds of dollars in PMI costs each month.

Down Payment Percentages by Age

As with the salary multiplier, some experts recommend adjusting down payment percentages based on your age and savings ability:

Age Down Payment Percentage
Under 30 5% – 10%
30-39 10% – 20%
40 and up 20%+

Younger buyers may not have had as much time to accumulate savings, so a 10% down payment gets them in the door. Older buyers can aim for 20% or higher down payments to avoid PMI, lock in more equity, and keep housing costs reasonable for their budget.

The 25% Gross Income Cap

Some mortgage lenders use a limit that total housing costs should not exceed 25% of your gross monthly income. This includes your mortgage principal and interest, property taxes, homeowners insurance, HOA fees, and any other housing expenses.

Capping housing costs at 25% of income builds an even larger cushion compared to the 28% guideline. It helps ensure you have plenty of room in your budget to pay for healthcare, food, transportation, and other essential and discretionary expenses. It also leaves more room for retirement and savings contributions.

Using the previous example where gross monthly income was $6,000, you would calculate 25% like this:

  • $6,000 x 0.25 = $1,500

So with this rule, you’d want to keep total monthly housing costs at or below $1,500 if your income was $6,000 per month.

The 1/3 Housing Cost Rule

Another simple guideline is that housing costs should not exceed 1/3 of your net take-home pay each month. Net pay is your income after taxes and other payroll deductions.

This rule directly compares housing against your actual take-home pay each month rather than your pre-tax income. Some argue it provides a clearer picture of how much you have leftover to cover other expenses.

To calculate this ratio, add up your monthly housing costs including mortgage, taxes, insurance, and HOA fees. Divide this by your average monthly take-home pay. It should not exceed 33% or 1/3.

For example, if your take-home pay was $4,500 per month and your housing costs were $1,500, your ratio would be:

  • $1,500 housing costs / $4,500 net income per month = 33%

This ratio falls within the 1/3 recommendation. If your housing costs were $1,800, the ratio would exceed 1/3 at 40% and may be unaffordable in the long run.

The Debt-to-Income Ratio

Your total debt-to-income ratio (DTI) also helps determine how much house you can afford. DTI looks at your total monthly debt payments divided by your gross monthly income.

Monthly debt payments include:

  • Proposed new mortgage payment
  • Car loans
  • Student loans
  • Credit cards
  • Personal loans
  • Child support
  • Alimony

Lenders typically limit total DTI to 43% for conventional mortgages and as low as 31% for certain FHA loans. The lower your DTI, the more affordable the home loan.

For example, if your total monthly debt payments are $2,000 and your gross monthly income is $6,000, your DTI would be:

  • $2,000 debt payments / $6,000 income = 33% DTI

This falls well below the 43% traditional limit, so you likely have room in your budget to afford more house.

Debt-to-Income Ratio Recommendations

DTI Range Recommendation
Below 36% Excellent for affordability
36% – 43% Generally qualified with good credit
Above 43% May have difficulty getting approved

The lower your DTI, the more affordable your total housing costs will be against your income. Aim for the low end of your lender’s guidelines for maximum comfort and financial flexibility.

Putting the Ratios Together

Looking at these key ratios together can give you a complete picture of how much you can afford:

  • Housing costs against income: 28% gross income, 25% gross income, or 1/3 net income
  • Total debt against income: Debt-to-Income Ratio below 43%
  • Down payment: At least 20% to avoid PMI
  • Multiplier rule: 2 to 3x gross annual income

Running through each of these guidelines based on your specific income, savings, debts, and household size will give you a ballpark figure to start your home search. Being conservative with these ratios allows more room in your budget while still letting you buy an affordable home.

The Reality of Home Prices

While the income and affordability rules above are helpful guides, the reality is home prices don’t always align perfectly with what you can afford based on your salary alone.

Especially in high cost-of-living areas, home prices may regularly exceed 3 times the median income. Global factors, interest rates, supply and demand, and market competition also impact prices.

If you are house-hunting in a high-priced market, you may need to adjust your search criteria. Some options include:

  • Looking at lower priced neighborhoods or farther out suburbs.
  • Choosing a smaller home with less square footage and land.
  • Buying a condo or townhouse instead of a single family home.
  • Making a higher down payment if you have the savings.
  • Paying above the list price in competitive bidding wars.

Getting pre-approved for a mortgage will help you understand the maximum you can borrow based on your income, debts, and credit score. From there, you may need to get creative if popular neighborhoods are outside your budget.

Expanding your search radius, lowering your minimum requirements, or buying a home needing renovations can help you find affordable options even in hot housing markets. Do not stretch your budget to the very limit or waive contingencies just to win a bidding war.

The Bottom Line

At the end of the day, what matters most is not the home’s price tag alone but whether it fits comfortably within your overall budget. The mortgage pre-approval process will look closely at the key ratios covered above to reach your borrowing maximum.

Aim to keep housing costs below 28% of your gross income as an affordable baseline. Going up to 36% income can work for those very comfortable living at the higher end. Buy a home price you can manage without becoming house poor.

While buying a home is a big part of the American dream, you don’t want mortgage payments that prevent you from saving, travelling, or enjoying retirement down the road. Keep this balance in mind and you’ll find a home that fits your income today and your financial goals for the future.

Conclusion

Determining how much house you can afford depends on many financial factors like your income, savings, debts, and credit score. While general rules of thumb can guide your home search, your mortgage pre-approval and specific financial situation will dictate your true maximum budget.

Aim to keep total housing costs including mortgage payments, insurance, taxes, and HOA fees below 28% of your gross monthly income as a baseline. Get pre-approved to understand your options. And allow some room in your budget for other goals by buying slightly below your maximum limit.

With smart budgeting, an affordable down payment, and moderate housing costs, you can land the right home for your income and financial situation today while still planning for a secure future.