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How Much House Can I Afford On 120K Salary

how much house can I afford on 120k salary

Are you asking yourself: how much house can I afford on 120k salary? The answer is here. First, we have to admit that the house you can afford depends on the location and your creditworthiness.

Key takeaways

  • A salary of $120,000 a year puts you in the middle-upper class in the United States.
  • To know how much house you can afford on 120k salary, you need to apply the 28/36 rule.
  • 28/36 rule states that no more than 28% of your income should be spent on housing and no more than 36% of your income should service debt, including home mortgage.
  • The Federal Reserve estimates that the median house price in the US is $436,800.
  • Following the 28/36 rule, you can afford a house of about $470,000.

How much house can I afford on 120k salary?

Before you even purchase a house, you should know that earning $120,000 a year puts you in the upper middle class in America. According to the recent census data, an average American earns $74,738 annually.

Therefore, a salary of $120,000 a year should get you a house that some Americans cannot afford. However, there are many factors that come into play when buying a house because house prices vary with location, size, and design.

To have a better understanding of how much house you can afford with $120,000 salary, you have to follow the 28/36 rule.

Follow the 28/36 rule

As a general guideline, financial experts often recommend that you should follow the 28-36% rule when planning to buy a house.

The 28/36 rule states that no more than 28% of your income should be spent on housing and no more than 36% of your income should service debt, including home mortgage. 

28% is the front-end ratio, which is the percentage of your gross monthly income dedicated to your mortgage payment (including principal and interest). 36% is the back-end ratio, which includes not only your mortgage but also other debts such as car loans, student loans, and credit card debt.

Let’s break down this rule to see what it means.

Your gross annual income = $120,000. This means that your monthly gross income = $120,000/ 12 = $10,000.

Now, let’s calculate the front-end ratio (28%) from your monthly income. Your maximum monthly housing payment = $10,000 x 28% = $2,800.

Then, the back-end ratio (31%) = maximum total debt payment (including mortgage, property taxes, insurance, and other debts) = $10,000 x 36% = $3,600.

How Much House Can I Afford On 120k Salary?

Estimating the house you can afford

With this information, you can see that you have up to $2,800 per month to spend on housing expenses. You can use this amount to pay for a down payment for a mortgage and then repay the mortgage monthly.

Generally, most people take a mortgage of about 30 years. Therefore, we will assume that you qualify for a mortgage facility that should be repaid in 30 years at a moderate fixed interest rate of 7%.

Now, you can decide to pay monthly principal and interest costs that are below $2,800 so that you have breathing space. In our case, we will assume that you will be paying $2,500 monthly principal and interest costs to your mortgage.

If you pay $2,500 monthly for 30 years on a fixed interest rate of 7% towards your mortgage repayment, you will easily afford a house worth $470,000. Now the question of “how much house can I afford on 120k salary” has been answered.

Therefore, the conclusion made is that the best estimate of a house cost for someone who earns 120k in the US is $470,000. This amount is well above the median cost of a house in the US, which is set at $436,800. It means that you can afford the average house anywhere in the US with a salary of $120,000.

These calculations provide a rough estimate. However, other factors such as your existing debt, credit score, and the amount of your down payment will also influence the mortgage amount you can afford.

Factors to consider when purchasing a home

You agree that income is a major consideration when shopping for a house. However, it is not the only variable that you should look at when buying a house. Instead, you should consider a dozen other factors that are explained below.

1. Interest rates and loan terms

The terms of your mortgage, including the interest rate and loan duration, will influence your monthly payments. Lower interest rates can lead to more favorable terms. Your choice of loan will depend on your financial comfort and stability.

The length of the loan also determines the amount of monthly payments and interest rates. For instance, a mortgage of 15 years will have higher monthly payments but lower interest rates compared to a 30-year mortgage.

The rule of thumb is to go for a mortgage that you can comfortably pay monthly. In our calculations, we considered a 30-years loan because it has favorable payment terms and reduces financial pressure on you.

2. Debt-to-income ratio

Your gross annual income is a crucial factor. Lenders typically use your pre-tax income to determine how much you can afford to borrow. In this case, your salary is $120,000 per year, which means you earn $10,000 monthly.

For someone earning $10,000 monthly, you would want your debt-to-income ratio to be 1:3 or less. We recommend that you keep your monthly debts below $3,600 if you want to get a good debt-to-income ratio.

3. Down payment

The amount of money you can put down as a down payment will impact the loan amount and, consequently, the house you can afford. A larger down payment can help reduce your monthly mortgage payment.

Since we are working with a salary of $10,000 a month, we recommend that your down payment be below the front-end ratio of 28%. Therefore, keep the down payment below $2,800 if you want some breathing space.

4. Credit score

Your credit score affects the interest rate you will receive on your mortgage. If you have a higher credit score, you will generally enjoy a lower interest rate, making your mortgage more affordable.

Remember that credit score is built over time depending on how you handle your credit. To be on the safe side, maintain a FICO credit score of above 700.

5. Location and amenities

The location of the house is also an important consideration when shopping for a house to buy. Some locations have good amenities and public facilities that make your life even better.

Additionally, it is crucial to consider other costs associated with homeownership, such as property taxes, homeowners insurance, maintenance, and utilities. Lenders often use more detailed financial information to determine your eligibility for a mortgage.

Final thoughts

The answer to the question: how much house can I afford on 120k salary is not definite. Instead, this question can only be answered by making some assumptions and doing some calculations.

We have used the 28/36 rule to estimate the house you can afford with 120k salary. We have estimated that a person earning 120k annually can easily afford a house worth $470,000 on a mortgage of 30 years at a 7% fixed interest rate. That person will be required to pay %2,500 monthly.

To get a precise estimate tailored to your situation, consider using online mortgage calculators or consulting with a mortgage advisor. They can provide insights based on your credit score, down payment, and other financial details.

Don’t forget to factor in additional homeownership costs, such as property taxes, homeowners insurance, private mortgage insurance (if your down payment is less than 20%), maintenance, and utilities.