Purchasing a house is a dream for many, but it can feel out of reach, especially if you don’t have a high salary or live in an expensive area. The national median household income is $74,580, according to Census data. While this might seem like a fair amount to live on, it can be hard to stretch this income enough to afford real estate.
Understanding the 28/36 Rule
The 28/36 rule is a useful guideline to start with. It suggests that you should spend no more than 28% of your income on housing costs and no more than 36% on total debt payments, including housing costs. Here’s how it breaks down:
- Yearly Income: $70,000
- Monthly Income: $5,833
- Maximum Housing Cost (28%): $1,633 per month
This $1,633 should cover your mortgage, property taxes, home insurance, and any HOA fees.
Calculating the Affordable Home Price
If we assume a 20% down payment on a 30-year fixed-rate loan with a 7% interest rate, you could afford a $240,000 home. However, you need to have enough money for the $48,000 down payment, closing costs, home inspection fees, realtor fees, and other related costs.
Key Factors to Consider
Down Payment Amount
The higher your down payment, the lower your mortgage. A lower principal means less interest.
Credit Score
A better credit score can get you a lower interest rate, making your mortgage more affordable.
Debt-to-Income Ratio
Keep your debt below 36% of your income. A favorable debt-to-income ratio makes it easier to get a loan.
Location
The national median home price is $407,100, so a $240,000 budget might limit your options. Consider looking in cheaper areas.
Size
If you can’t compromise on location, consider smaller homes, which are usually cheaper.
House Financing Options
Most people need to finance their home purchase. Here are some common loan options:
Conventional Loans: Require a credit score of at least 620. You can get one with a 3% down payment if needed.
FHA Loans: Ideal for those with lower credit scores. A score between 500 and 579 requires a 10% down payment, and a score of 580 or higher requires only 3.5%.
USDA Loans: For low- and moderate-income borrowers in designated rural areas.
VA Loans: No down payment required for qualified military members, veterans, and surviving spouses.
Buying a home on a $70,000 salary is possible with careful planning and budgeting. By understanding your limits and exploring different financing options, you can make your dream of homeownership a reality. Remember to consider all costs involved and be flexible with your location and home size to find a place you can afford.
FAQs
1. What is the 28/36 rule?
The 28/36 rule suggests spending no more than 28% of your income on housing costs and no more than 36% on total debt payments.
2. How much house can I afford with a $70,000 salary?
You can afford a home worth about $240,000 with a $70,000 salary, assuming a 20% down payment and a 7% interest rate.
3. Why is my credit score important when buying a house?
A higher credit score can get you a lower interest rate, making your mortgage more affordable.
4. What is a good debt-to-income ratio?
A debt-to-income ratio of 36% or lower is considered favorable for getting a loan.
5. What are some common types of home loans?
Common home loans include conventional loans, FHA loans, USDA loans, and VA loans.