Owning a home is a dream for many. However, purchasing one is a complex process. From making an offer to negotiating closing costs, the financial aspects of home-buying can be frustrating for even the savviest shopper.
What We'll Cover
However, one thing that shouldn't feel challenging should be figuring out the income you need to qualify for a mortgage. If you’re looking for a jumbo loan between $400K and $500K, read on to learn more.
The Income Needed To Qualify for a $400K Mortgage
Unfortunately, there's no magic bullet for determining the exact income needed for a $400K mortgage. However, we can generate an estimate based on some basic calculations.
Most mortgage lenders follow the 43% rule, which stipulates that all of the bills you pay each month — including your mortgage, taxes, insurance premiums, credit card payments, and utilities — should total less than 43% of your total annual income.
Essentially, banks won’t consider borrowers with a debt-to-income ratio or DTI above 43%.
In order to calculate how much you can afford to pay each month, you'll need to know:
- The total amount of your down payment. Your mortgage only needs to cover the total cost of your new home minus the amount of your down payment.
- The base interest rate. The interest rate will contribute to the amount that you’ll need to pay every month.
- The length of the mortgage or the term. Whether you’d like a 20- or 30-year mortgage — or a different timescale entirely — will depend on whether you want to make fewer, more expensive payments or more, less expensive payments. Note that you’d end up paying more interest for the second choice.
- Mortgage insurance, property taxes, and homeowners insurance. Although these costs vary, they may be added to your mortgage payment. Note that, although these three items can be bundled into a single mortgage payment each month, your bank will set up an escrow account to withdraw payments for each.
- Other fees, such as closing costs. These can be factored into the mortgage payments or simply included as a separate payment. The first will reduce your ability to pay more of your mortgage every month.
Although these considerations can vary widely, we can make a broad-scale estimate to roughly determine the income needed to qualify for a $400K mortgage.
For example, if you make a $55,600 downpayment on a $400K house and qualify for a 4.25% 30-year mortgage, your minimum monthly income should be $8,178 (assuming that less than $1,000 per month is used to pay down other debts).
According to this calculation, a prospective homebuyer looking to purchase a $400K house should make roughly $100,000 a year. Again, this number may vary with other considerations such as budget limitations, other loan obligations, and the details of your mortgage. However, it should hopefully serve as a working estimate.
The Income Needed To Qualify for A $500k Mortgage
Similar to the discussion presented above, it can be difficult to determine what income is required for a $500K mortgage. However, we can use an even simpler calculation than the one provided above.
A good rule of thumb is that the maximum cost of your house should be no more than 2.5 to 3 times your total annual income. This means that if you wanted to purchase a $500K home or qualify for a $500K mortgage, your minimum salary should fall between $165K and $200K.
Again, these mortgage income requirements are highly variable and depend on many factors. However, if you're looking to generate a rough estimate of the kind of mortgage you can afford, your best bet is to multiply your total annual income by 2.5 or 3.
The resulting number should give you a general idea of the mortgage amount you’ll likely qualify for.
You can also follow the 28/36% rule. This means that you should spend no more than 28% of your gross monthly income on housing expenses and no more than 36% on debts. To determine 28% of your monthly income, multiply your monthly income by 28 and then divide by 100.
If your monthly income is $8,000, here’s the limit for your mortgage payment each month:
8,000 x 28 = 224,000. Next, divide that total by 100. 224,000 ÷ 100 = 2,240.
FHA Loan Limits in 2021
The Federal Housing Administration (FHA) regulates the maximum amount of mortgage loans that can be awarded to potential homebuyers. These loans are based on the median price of homes in specific counties and cities, with maximum loan amounts set at 115% of area median house prices.
In 2021, these loan limits will reach a maximum value of $822,375 in high-cost areas. This increase (from a previous maximum value of $765,600) is due to the rise in home values over the past year.
While the value of $822,375 represents the national loan "ceiling" or the highest loan amount that an applicant can receive, the loan "floor" or minimum possible loan has also increased to $356,362.
This means that, depending on what your salary is and where you're looking to buy a home, you may easily qualify for a $400K or even $500K mortgage.
Because the FHA loan limits are based on the median home value in a given county or city, a jumbo loan may be well within your reach.
For more information, check out this resource about FHA Loan Limits By State to identify the FHA loan limits in your county. The information will help you make a more informed decision about choosing a home location and qualifying for a jumbo loan.
Qualifying for a Jumbo Loan Is Possible
If you're overwhelmed by the home-buying experience, don't despair. Although buying a home can be difficult, there are tools you can use to calculate how much income you'd need to qualify for a $400K or $500K mortgage.
Additionally, with FHA loan limits increasing in 2021, you may be able to qualify for a loan based on your location. Given the costs associated with mortgages, anyone making between $100K and $200K a year should be in a relatively good position to qualify for a $400K or $500K mortgage.
With the above information, you have the tools needed to purchase your dream home in 2021. So, go ahead and explore — the housing market is your oyster!