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How much money do I need to earn annually to buy a $400,000 home?

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Over the past two years, the combined effects of the global pandemic and housing shortages have sent home prices skyrocketing. Between 2020 and 2022, house prices will increase by 30%, According to Freddie Mac. And by 2022, the median selling price of a home in the United States will be $397,549. According to Redfin.

Under such pressure, mortgage interest rate is also rising sharply, making monthly payments even more difficult. The average national mortgage rate is now 6.9%, 3.8 percentage points higher than last year, according to Redfin’s report.

There are many factors to consider when determining how much home you can afford, but salary is an important one. The editor of Fortune Recommend calculated the numbers to find out what salary he would need to buy a $400,000 home in the United States.

Soaring house prices

The real estate industry’s runaway over the past few years has been well documented.

The median home sale price in October 2019 was $293,109, according to Redfin data. But his COVID-19 pandemic in January 2020 brought a complete storm of market forces that pushed home prices higher. This includes record-low mortgage rates, a shortage of housing inventory as people shelter indoors and postponed home sales, and increased competition to buy homes as remote work suddenly takes over. I was.

“In 2021, the country sold more homes than it has in the last five years,” says agent Scott Bergman. Realty One. “One of the biggest reasons home prices have skyrocketed has been low interest rates. Demand increased, but supply did not … meaning buyers competed fiercely for homes, and many had to pay significantly more than the asking price. It’s a top contender for home sellers.”

Offers of $50,000 or more above the asking price became commonplace as buyers tried their best to beat the competition. Fast forward to 2022, and the median home sale price has risen to $397,549 nationwide, which combined with the recent rise in mortgage rates has put a heavy strain on many home buyers.

Impact of rising interest rates on affordability

Interest rates are another major piece of the puzzle when it comes to housing affordability at the moment. in the past year, Federal Reserve Board Raises Federal Funds Rate It has pushed up the cost of consumer borrowing, including mortgages.

According to Redfin, interest rates averaged 3.4% as of January 2022, which is relatively low. But this year he reached an average of 6.9% by October. This change has had a huge impact on buyers and monthly buyers. mortgage payment.

“You can buy a $400,000 house in January and pay $1,550 monthly principal plus interest at 3.125%. $800 more.” Omaha Mortgage Mutual.

The bad news, at least in the short term, is that interest rates are likely to continue rising before they start falling again. The Federal Reserve is expected to announce another rate hike in mid-December. “Interest rates will come down eventually. But before then he could be close to 9%. It will never be where it is in 2021,” he said.

How much do you need to buy a $400,000 house?

With all these factors in mind, how much income would you need to reasonably cover the current median selling price of a home in the United States?

According to Brian Walsh, senior manager of financial planning at CFP, Sophie, for a fintech company, buying a $400,000 house requires a net or take-home pay of about $10,500 to $11,000 per month. According to Walsh, annual income ranges from $165,000 to $195,000, depending on where you live, your tax status, and other tax withholdings.

Walsh’s calculations are based on several cost assumptions.

“The average monthly income for a $400,000 home is $3,037,” says Walsh. “This represents a typical first-time homebuyer down payment of 7%, an average interest rate of 6.61%, an average property tax rate of 1%, homeowners insurance $140/month, average mortgage insurance 0.6%. ”

Walsh’s salary guidelines are also based on the idea that mortgage payments, including property taxes and insurance, should not exceed 28% of gross income. However, this recommendation may or may not be appropriate depending on other financial commitments and liabilities.

“If there are other major costs such as: debt payment Or if you’re parenting, this rule of thumb can be a little tricky to follow,” explains Walsh.

It’s also important to point out that the monthly mortgage payment quoted by Walsh for a $400,000 house can vary greatly depending on almost all the variables used in his calculations. For example, if a buyer brings a large down payment to the table, they will borrow less money, resulting in a lower monthly mortgage payment.

Additionally, if the buyer has a down payment of more than 20%, the requirement for private mortgage insurance is usually eliminated, taking that cost out of the equation. The location of the home also affects overall costs such as property tax burden and insurance premiums.

In short, says Walsh?it’s important to do the numbers according to your budget and special situations. Use our mortgage calculator and enter the numbers to see the exact amount of home you can buy.

But there is no denying that homebuyers are in an increasingly difficult position as house prices rise, he added.

“Borrowers should either earn a higher income or pay a larger down payment to keep their level of debt relative to income reasonable,” concludes Walsh.

Takeaway

As the real estate market continues to evolve, so do the salaries demanded of homebuyers. In the current environment, having a larger down payment is helpful, but no matter how much money you put into the sale, do the math carefully and make sure your mortgage payments are within your income and budget. Please confirm.

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