Did you just land a new job or get a big pay raise?
Or maybe you're reconsidering your finances and want to know how much house you can really afford with your currently monthly income.
In this post, I'll answer the question “how much house can i afford on 120k salary”, some tips to keep your budget balanced, and much more. Let's get started!
How Much Mortgage Can I Afford?
If you have an annual income of 120,000, you'll bring in about $10k a month before taxes.
A monthly income of $10,000 is a significant amount in terms of money, allowing you to afford many monthly expenses without damaging your finances.
When it comes to housing costs and how much house you can afford this can be a tricky question.
There are several factors that will determine how much mortgage you can be approved for.
Your Credit Score
The first thing to note is that making a $120k salary means much less if you have poor credit.
Your credit score dictates the interest rate on your mortgage, which will directly impact the monthly payment on your home.
With good credit, you can take out a larger loan with a lower interest rate, meaning that you could ostensibly afford a more expensive house.
While an annual income of $120,000 sounds very nice on paper, poor credit could leave you with no other option but to buy a much less expensive home.
If you have good credit or even only decent credit, you are well on your way to affording a large house with a low-interest mortgage.
If you are asking yourself, “How much house can I afford on 120k salary?” you should first consider what your credit score is.
Your Down Payment
While experts recommend putting 10% to 20% of the house's cost as your down payment, you may elect to put down more money to lower your monthly payments.
Down payments are something of a wildcard when it comes to how much home you can afford, as they can vary wildly depending on your financial circumstances.
If you have saved up cash for years, you can put down a sizable amount of money, which would allow you to comfortably afford a larger home with a cheaper mortgage and lower interest rate.
Because of the variable nature of interest rates, it can be hard to estimate your mortgage payments without your full financial profile.
After all, you may choose to tap into some large sum of cash reserves to lower your monthly mortgage payment.
For our purposes, we will be assuming a general 10% to 20% figure, though you are free to put down as much money as you are comfortable with.
In many cases, a larger down payment is better for your finances. If you would like to lower your total yearly housing costs, you may want to put more money down!
Debt to Income Ratio
Another determining factor in how much house you can afford if you make $120,000 a year is your debt to income ratio.
This ratio is determined by calculating all of your monthly debts and dividing them by your monthly income.
For example, if you make $120k a year ($10k a month) and your monthly debts are $2,500, your DTIR would be 25%.
Ideally, you will want to keep your debt to income ratio below 36%, though some lenders may allow a higher debt to income ratio in some scenarios.
Other debts like student loans, car payments, and credit card payments will all affect what home you are able to afford.
Additional Costs of Owning a Home
When it comes to your mortgage payment – there are other costs in addition to your interest rate and principal that you need to be aware of.
For example, most homeowners are also responsible for paying property taxes and homeowner's insurance.
These additional costs can add a few hundred dollars to your monthly mortgage payment, so you need to be prepared for that when considering how much house you can afford.
If you put less than 20% down, you may be required to pay private mortgage insurance premiums (PMI) that can add additional costs to your monthly mortgage payments.
You should also be prepared for the additional costs of owning a home like maintenance, repairs, and upgrades.
Finally, you'll need to remember that you'll be responsible to paying closing costs on your mortgage that can cost 2% to 3% of your homes purchase price.
The 28/36 Rule
One of the best rules of thumb for calculating how much of a mortgage you can afford on a 120k salary is the 28/36 rule.
This rule is a good rule which states that you should not spend more than 28% of your pre tax household income on housing expenses.
These housing expenses include interest payments, homeowners insurance, property taxes, and your monthly principal.
Following the 28/36 rule, you should not allocate more than $2,800 per month on these expenses with a 120k salary.
The second part of this rule of thumb entails that your debts should not take up more than 36% of your total income.
These debts include your monthly mortgage payment, your car loans, insurance rates, and any other financial obligations.
One of the easiest way to meet this rule of thumb requires putting down a larger down payment.
Putting down a larger sum of cash means fewer ongoing expenses, making your finances more likely to meet this general rule.
With fewer monthly expenses to worry about, your finances will be more free going forward, or you can pick up a larger mortgage to make up for this.
Either way, when considering this great rule of thumb, you can assume that somebody making $120,000 per year with an average down payment can afford to spend around $33,600 per year on a mortgage.
The single most common form of mortgage is the 30-year fixed mortgage, which lives up to its name – it does not change, meaning that you will have the same mortgage and interest rates for the full thirty years.
Assuming that this is the mortgage you choose to go with, and you follow this general rule, you can afford on 120k salary a house that is worth up to $1,000,800.
Of course, it is important to remember that a larger sum of cash put down upfront can affect just how much house you can afford and the amount you owe on your mortgage.
By keeping a high credit score and putting more cash down, you can easily up your mortgage from $1,000,000 to anywhere from $1,500,000 or even $2,000,000!
What House Can I Afford on 120k Salary?
On a salary of $120k, you can afford a home that is more valuable than most people. However, you may not know exactly what this means.
Depending on the location and the state of the housing market, a million-dollar house can mean different things. One million dollars will not buy you a mansion in every city!
In a market that favors those who sell their house, a million-dollar home may not net you much.
For example, in Los Angeles, one million dollars will only net you a 1,300-foot single-family home with three bedrooms and two bathrooms.
In other states, this house could go for $200,000-$400,000!
While you could certainly live comfortably in a million-dollar California home, it won't be luxurious.
On the other hand, markets with lower property value are guaranteed to give you more bang for your buck.
Take Texas, for example. In Texas, you can get a multi-story home with five or six bedrooms averaging anywhere from four to six thousand square feet.
This home size does not even account for the acreage that may come with the home in places such as Texas, Utah, or Montana due to their large, flat landscapes.
The most important thing to remember here is that, while you may be able to afford a million-dollar house, you have to consider where that million-dollar home is before deciding to buy it.
Additionally, certain locations may have higher property taxes. These hidden fees are another factor you must beware of when searching for your million-dollar home!
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Final Thoughts on How Much House Can I Afford on 120k Salary
When it comes to how much house you can afford on a 120k salary, the answer is – it depends.
However, if you follow the general 28/36 rule and consider all other fees associated with purchasing a home, you can arrive at a number that is comfortable for you.
Your loan may be approved for a certain amount, but this does not mean that you have to spend the entire loan on your home.
Ultimately, having a mortgage payment of around $2,000 to $3,000 per month will keep your finances in check. In most scenarios, this can afford a home worth around anywhere from $300,000 to over $600,000 depending on several factors.
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