Over the past few years, prospective homeowners have chased a moving target: homeownership.Getting approved for the right type of mortgage and getting the best interest rate possible are of course top of mind, but income is another piece of the puzzle.
The median sales price of houses sold in the U.S. stood at $417,700 in the fourth quarter of 2023—down from a peak of $479,500 in Q4 2022. But that drop hasn’t made homebuying much easier since mortgage rates remain high. As of May 20, 2024, the average 30-year fixed rate mortgage rate stands at 7.09%, according to Mortgage News Daily.
So, if you’re in the market for a house and wondering how much you need to earn to afford one, we’ve got your back. We crunched the numbers to find out how much you need to earn to afford a $400,000 home in the U.S.
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The steep climb of home prices
The real estate sector has been on a wild ride over the past few years.
In the first quarter of 2020, the median sale price for a home stood at $329,000. But the emergence of the COVID-19 pandemic in March 2020 brought about a perfect storm of market forces that drove home prices upward.
“In 2021, the nation sold more homes than it had in the last five years,” says Scott Bergmann, an agent with Realty One. One of the biggest reasons home prices shot up so much, according to Bergmann, was record-low interest rates, which encouraged more buyers to jump into the homebuying market.
However, while demand increased, supply did not. Housing inventory became scarce as people held off on listing homes for sale while they sheltered in place. Plus, disruptions to the supply chain slowed new construction. “So that meant buyers were competing heavily for a home purchase, and a lot of buyers had to pay quite a bit over asking price in order to be the front-runner with home sellers,” Bergmann adds. In fact, offers of $50,000 or more over asking price became the norm.
How interest rates impact affordability
Interest rates are another major piece of the housing affordability puzzle. Since March 2022, the Fed has increased the federal funds rate 11 times. These rate hikes, in turn, have driven up the cost of consumer borrowing, including mortgages.
The most recent Fed rate hike was in July 2023, and placed the Fed’s target rate at 5.25% to 5.50%.
In March 2022, mortgage rates were still relatively low, averaging 4.67%. Today, however, rates are the highest they’ve been since the year 2000—butthey may be done climbing.
The Fed hasn't pumped the brakes on rate hikes just yet and many experts believe it will begin cutting rates in 2024. However, it’s highly unlikely mortgage rates will drop to 2021 levels, according to Derek Amos, senior mortgage loan originator with Mutual of Omaha Mortgage.
It's also important to remember that the cost of a home includes more than just a property’s sticker price. So be sure to take a holistic view of the upfront costs.
"Buying a home involves more money out-of-pocket than just the down payment,” says Shelby McDaniels, Channel Director for Corporate Home Lending at Chase. For example, closing costs cover expenses such as appraisals, inspections, attorney fees, title insurance, and more. They typically run between 2% and 6% of the loan amount, and are either paid up front or rolled into the loan.
“It’s important to work with an agent and lender in your local market who can provide clarity on closing costs specific to your market,” McDaniels says. “If you can’t pay for the closing costs, you won’t be able to move forward with purchasing the property."
How much do you need to make to afford a $400,000 home?
With all of these factors in mind, how much do you need to earn in order to reasonably afford a $400,000 home in the United States? Here’s how the math breaks down:
- Purchase price: $400,000
- Down payment: 7% ($28,000)
- Loan term: 30 years
- Loan interest rate: 7.09% (fixed)
Even though it’s often recommended that homebuyers put down at least 20% on a home purchase, the typical down payment for first-time homebuyers is closer to 7%. Keep in mind that when putting down less than 20% on a conventional mortgage, you’ll need to pay private mortgage insurance (PMI) until you accumulate 20% equity in the home.
Using our example, a 7% down payment on a $400,000 home would equal $28,000, so you would need to borrow $372,000. The monthly payments on a 30-year fixed rate mortgage for this amount would be about $3,077, including principal and interest, homeowners insurance, property taxes, and PMI.
Ideally, your mortgage payment shouldn’t take up more than 28% of your gross (pre-tax) income, according to Brian Walsh, a certified financial planner and senior manager of financial planning for SoFi, a fintech company.
That means you’d need to earn about $10,839 a month, or $130,068 per year, in order to afford a $400,000 home. Your actual take-home pay will depend on your state of residence, tax filing status, and other withholdings, Walsh says.
Of course, the 28% recommendation is just a guideline and may or may not be appropriate depending on your other financial commitments.
“If you have other major expenses such as debt payments or childcare, it may be a little more challenging to follow this rule of thumb,” explains Walsh.
The monthly mortgage payment on a $400,000 home can also vary significantly. For instance, your loan type (variable versus fixed rate), down payment amount, property taxes, homeowners insurance, and interest rate will all have an impact on your monthly payment.
The upshot? Walsh says to run the numbers based on your budget and unique circ*mstances. You can use a mortgage calculator to plug in your current income and monthly financial obligations to see exactly how much home you can afford.
“Borrowers will either need to have higher incomes or make larger down payments to keep their debt-to-income level reasonable,” Walsh says.
The takeaway
As the real estate market continues to evolve, so do the financial demands on home buyers. Saving up a larger down payment will be helpful in the current environment. But no matter how much money you bring to the closing table, make sure that your mortgage payment fits comfortably within your income and budget—before you sign on the dotted line.
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| 4.7 stars from 33K rankings | 4.5 stars from 13K rankings | 4.6 stars from over 500 rankings |
| Mortgage Experience | Mortgage Experience | Mortgage Experience |
| Over 35 years; Rocket Mortgage introduced in 2015 | Over 20 years | Over 20 years |
| Learn More at Rocket Mortgage | Learn More at AmeriSave Mortgage | Learn More at New American Funding |
