This Is How Much Money You Need to Make to Afford a $500,000 Home

Buying a house is one of the most consequential decisions of our lives. It is a huge investment that can provide you with a sense of security and a place to call home. However, it can also be a stressful and overwhelming experience. The average sales price of a home has increased by almost 40% since the start of the COVID-19 pandemic, hitting a record high of $552,600 in Q4 2022, before dropping to $516,500 in Q1 2023.

With home prices so high, you may be wondering what salary you'd need to earn to afford a home costing $500,000. This question can be difficult to answer, but with a few simple calculations, you can get an estimate of how much you need to make to purchase a home at this price point.

28/36 ratio rule

The 28/36 mortgage rule is a helpful guide to calculate how much you need to make. This rule suggests that borrowers should devote no more than 28% of their monthly gross income to housing expenses. This is known as the front-end ratio.

The rule also holds that no more than 36% of your total monthly income goes to all debt obligations. This is the back-end ratio. Following this rule could help homeowners avoid stretching their budgets too thin and potentially falling behind on payments.

This rule is often used by lenders in determining how much they will lend you.

How much do I need to make for a $500K house?

Based on the 28/36 rule, you would need a salary of around $170,228 per year or $14,186 per month to comfortably afford a $500,000 home. Here's how the calculations work:

• Home purchase price: $500,000
• Down payment: $30,000 (assuming 6% of the purchase price, the average amount for first-time buyers, per 2022 data from the National Association of Realtors)
• Loan term: 30 year fixed-rate mortgage
• Loan interest rate: 6.39% (the average rate as of May 18, 2023)
• Monthly mortgage payment: $3,227
• Average monthly homeowners insurance premium: $149
• Average monthly property tax: $471
• Average monthly HOA fees: $125
• Total monthly housing expenses: $3,972
• $3,972 / 28% = $14,186 monthly income required

A common mistake that people often make is only calculating the mortgage payment and not including all the true costs of homeownership, such as property tax, homeowners insurance, and potentially HOA fees. To be safe, you may want to add in a buffer for maintenance costs.

But even if you are making this amount, the other half of the rule requires you to take into account your other debt. This could be credit card debt, car loans, or other personal loans. Let's say this amounts to $700 a month. We add that to the total housing expenses to calculate your back-end ratio:

• $3,972 + $700 = $4,672
• $4,672 / 36% = $12,977

So in other words, you will need to make at least $13,000 a month to afford a $500,000 home and the $700 debt payment for a mortgage lender to feel comfortable lending you the money.

How much can I afford now?

If you currently make $5,000 a month, using the 28/36 rule this is how much you can afford.

$5,000 x 28% = $1,400 total housing costs

$5,000 x 36% = $1,800 total debt payments (housing costs + other debt)

However, keep in mind that other factors like interest rates and down payments could also affect a home's affordability. It is always better to be more conservative. By working with a trusted lender and calculating your budget carefully, you can increase your chances of success as you embark on your home-buying journey.

Buying a $500,000 home is a large investment that requires careful consideration and planning. If you use the 28/36 ratio rules, you can estimate how much money you need to make to afford a home at this price point. Remember, owning a home is not just about the initial purchase price, but also the ongoing expenses associated with homeownership. By doing your research, being diligent with your budget, and working towards your financial goals, you can make owning a home a reality.