What Mortgage Can I Afford with my Salary?

Buying a house is an exciting time, but financing a house can be stressful, too. If you are wondering what mortgage would be affordable for you, you are not alone. The short answer is generally you should consider mortgage loans with a monthly payment that is 28% or less of your pre-tax monthly salary. As an example, let’s look at the annual median household income in Indiana of $58,235 or $4,853 a month. Using the 28% rule, this household should consider mortgages with a maximum monthly payment amount of $1,359.

You are probably now saying to yourself, that still doesn’t answer the question how much house can I afford based on my salary. You’re right, and this is because the purchase price of a house can’t be calculated with just the maximum monthly mortgage payment. Here are some of the other variables that need to be considered before you decide what purchase price of a home is within your budget.

Debt-to-Income Ratio
Down payment amount
Mortgage specific factors (like interest rate, mortgage length, property taxes, and home insurance)

The long answer to the question “How much of a mortgage can I afford based on my salary?” is that it depends on a combination of all of these factors. We will go through each one in the rest of this blog, so that you have a full understanding of all the elements involved.

We know there are many percentage of income for mortgage calculator options online that will do that math for you. These can be a great starting point as you begin researching your mortgage options. But understanding what these calculators are looking for and what other factors are likely to affect your mortgage affordability will make the whole process easier.

1. Debt-to-Income Ratio

Because a mortgage will be a large payment you will be making every month for many years, it is important that you look not only at what your monthly salary is, but also what other bills you pay each month. If you have expensive monthly liabilities (things like credit card payments, student and auto loans), you want a mortgage payment you can still afford.

According to Investopedia, in general you (and mortgage lenders) do not want a total debt-to-income-ratio over 36%. Let’s look at an example to make this clearer. If we look at the median Indiana household from above and add in some other average debt amounts:

$4,853 monthly salary
$1,359 monthly mortgage payment based on 28% of salary
$252 average total monthly student loan payment
$503 average total monthly car loan payment

$1,359 + $252 + $503 = $2,114 monthly debt

Monthly debt / monthly salary = 0.44 x 100 = 44%

This means that even though the mortgage amount of $1,359 a month was within the recommended 28% of monthly salary, it would be too high for an affordable mortgage payment when other debts are considered.

Using these same numbers, a simple mortgage calculator will show:

36% of $4,853 monthly salary = $1,747 total debit based on debt-to-income ratio

$1,747 - $252 student loan - $503 car loan = $992 maximum monthly mortgage payment

2. Down Payment Amount

The amount you pay in a monthly mortgage payment depends on several factors, the price of the house being the biggest. How much you pay as a down payment can have a large effect too. So the question “What is the income needed for a $500K mortgage?” has a different answer than “What salary do I need to buy a $500K house?”

According to Time, although 20% of a house price may be the gold standard for down payments, the reality is that the average down payment on a house in 2022 is 12% (and many young or first time home buyers go as low as 3%). Let’s see what these numbers do for our $500K house example:

20% of $500K = $100K, leaving a $400K mortgage amount
12% of $500K = $60K, leaving a $420K mortgage amount
3% of $500K = $15K, leaving a $485K mortgage amount

IMCU even offers some programs with down payments as low as 0%. This means home buyers have more options for choosing the payment schedule that works best for them.

3. Mortgage Specific Factors

The last piece of the puzzle for your salary needed to buy a house calculator is the specific terms of your mortgage and home. The most common of these are:

Interest rate: This depends on your lender. We at Indiana Members Credit Union (IMCU) offer some of the most competitive mortgage rates. Interest rates fluctuate over time and also depending on the type and length of mortgage and the amount of your down payment. Check the mortgage loans section of our website for the most up-to-date rates.
Length of time: Mortgages are most commonly issued for 15 or 30 years. Generally, the shorter the length of the mortgage, the lower the interest rate and total amount paid back, but the higher the monthly payment since you will be paying them off more quickly.
Property taxes: Your monthly mortgage payment will include one month’s worth of your total property tax bill as well. This amount varies wildly by area and home, but is important to know when calculating your monthly payment.
Homeowners Insurance cost: This is also included in your monthly mortgage payment, and needs to be factored in.

IMCU: Your Service-First Mortgage Lender

We know trying to keep track of all of these calculations can be a challenge, so find a mortgage lender that cares about you and your community. At Indiana Members Credit Union, our first priority is serving you so you can achieve your home ownership dreams. We have experienced loan officers who can walk you through every step along the way - from a first conversation about your eligibility to your final house closing.