Are you overwhelmed trying to determine if you can afford a house on a $30k annual income?
You’re not alone – many first-time homebuyers face this dilemma. The dream of homeownership may seem distant as you worry about mortgage payments, down payments, and other financial responsibilities.
But don’t let this concern hold you back from achieving your goals! In this blog post, we’ll help you navigate the home-buying process, providing a practical approach to determine how much house you can afford on your income.
Say goodbye to stress and hello to your future home!
I Make $30K a Year. Can I Buy a House?
Sarah, Kevin, and Mikayla all want to buy a house. They all make $30,000.
- Sarah has saved $5,000 toward her down payment and has $200 in monthly debts. Her credit score is fantastic, and she gets an interest rate of 4%. She can qualify for an FHA loan of $100,000.
- Kevin has saved $20,000 toward his house and has $600 in monthly debts. His credit score is okay: he gets a rate of 5%. He can qualify for a conventional loan at 5%, but only for $60,800.
- Mikayla has saved $0 toward her house and has 0 monthly debts. Her credit score is great. She qualifies for a rate of 4%. She can get a mortgage for $129,800 through the USDA loan program.
In some scenarios, having fewer monthly debts is more important than having a big down payment. Furthermore, having a good credit score also matters because it affects how much you will pay in interest and, therefore, your affordability.
How Your Income Impacts Your Mortgage Amount
You must prove you can afford the monthly payments to get a mortgage.
Lenders do this by looking at your debt-to-income ratio (DTI). Your monthly debt is divided by your gross monthly income (before taxes).
If you make $3,000 monthly and have $500 in monthly debts, your DTI would be 16.7%.
You usually need a DTI of 43% or lower to qualify for a conventional loan. You need a DTI of 46% or lower; an FHA loan is more forgiving.
As you can see already, though, it’s really not about your monthly income. It’s about the ratio between monthly income and debt.
If you reduce your debt by $200 monthly, you’ve essentially increased your income by $200.
Debt-to-Income: Why Debts Can Matter More Than Income
As we just discussed, your DTI is a key factor in determining how much house you can afford.
Why is it that debts matter more than income?
Because frequently, it’s easier to pay down your debt than try to increase your income.
Think about it: if you’re making $30,000 a year and get a raise to $33,000 a year, your monthly income only goes up by $250. But if you get rid of a $250 monthly debt payment, you’ve effectively increased your income by that much.
Many people try to increase their income without realizing that their debts really matter that much more.
Further, a debt, like carrying a credit card balance, often matters more than things like student loans or personal loans, which have lower monthly payments. Having a student loan or student loan debt is usually expected.
Down Payment: How Much Do You Actually Need?
If you make $40,000 a year and have no monthly debts, you probably think you could afford a big house.
But that’s actually where your down payment becomes a limiting factor.
Let’s say you’re going for an FHA loan. You need to put 3.5% down. If you have $2,000 saved, that would only qualify you for a $57,000 home. You would need at least $3,500 for a $100,000 house, and so forth.
A higher down payment can help you afford a more expensive home, but it’s not always necessary.
You can actually qualify for some programs with as little as 0% down. For example, the USDA loan program I mentioned earlier allows people to finance up to 100% of their home’s purchase price.
But generally, you should put down around 3.5% to 10%. So, the amount of cash you have saved may actually impact how much you can afford more than your income. Once again, it’s a mix of factors.
How Your Credit Score Impacts Your Mortgage mount
We’ve discussed how your income and debts affect your ability to afford a house. But one more factor comes into play: your credit score.
Your credit score directly affects the interest rate you’ll be offered on your mortgage. The higher your credit score, the lower your interest rate will be.
This is because lenders see people with higher credit scores as less risky. They’re more likely to pay back their loans on time.
For example, let’s say you have a $100,000 mortgage with a 4% interest rate. Over 30 years, you would end up paying $143,739 in interest.
But if your interest rate was just 0.5% higher, at 4.5%, you would pay $171,917 in interest.
That’s a difference of almost $28,000. And it all comes down to your credit score.
But that’s not even the most important difference. The most important difference is in your monthly payments.
With a 4% interest rate, your monthly payment would be $477.42. But with a 4.5% interest rate, your monthly payment would be $506.69. You may feel you can afford that, but the bank might not.
If your credit score weakens, you may need to make some debt payments. In general, keep your credit utilization down below 30% of your credit line.
Housing Affordability: More Than Just a Mortgage Payment
So far, we’ve talked about the monthly mortgage payment and how it’s determined by things like your income, monthly debt payments, credit score, and interest rate.
But there’s more to affordability than just your home loan payment.
In addition to the home loan itself, you also need to factor in things like:
- Property tax
- Homeowners Insurance
- Maintenance and repairs
Frequently, these will be introduced into the calculations. If you have tremendous property taxes, you can pay less for the house itself. You may qualify for fewer homes if your homeowners’ insurance rates are very high. (You usually double-check your home insurance late in the mortgage process, so it could cause a problem.)
As a general rule, the underwriters look at property taxes, homeowners insurance, and HOAs. If you have a pretty good debt-to-income ratio, don’t worry about it. But if you’re at the edge of affordability, these things can impact whether you qualify for a loan.
On a personal note, you should also consider utilities, maintenance, and repairs. While your utility bills may be similar as you shift from renter to homeowner, your maintenance and repair costs will increase considerably.
How to Buy a House with a $30,000-a-Year Salary
So, let’s actually get into how you can buy a house with a $30,000-a-year salary, step by step.
Check Your Credit Report and Fix Any Errors
You first need to get a copy of your credit report and check it for errors. If there are any errors, dispute them with the credit bureau.
You can get a free copy of your credit report from each of the three major credit bureaus (Experian, TransUnion, and Equifax) once per year.
You can also get a free copy if you’ve been denied credit in the last 60 days.
If you find any errors, dispute them with the credit bureau. You can do this online, by mail, or over the phone.
Make a Plan to Pay Off Any Debts
The next thing you need to do is make a plan to pay off any debts. This will help improve your credit score and make you a more attractive borrower.
You should pay off as much debt as possible before applying for a mortgage. But if that’s not possible, try to at least pay off any high-interest debt, like credit card debt.
You can consolidate your debt into a lower-interest loan, like a personal loan or balance transfer credit card.
You could also try negotiating with your creditors for a lower interest rate. They may be willing to work with you if you have a good history with them.
Remember, the lower your debt, the better. This will improve your chances of getting approved for a mortgage.
Save Up for a Down Payment
The next step is to start saving up for a down payment. As mentioned, you’ll need at least 3.5% for an FHA loan.
If you have a down payment of 20% or more, you’ll avoid paying for private mortgage insurance (PMI). This is insurance that protects the lender if you default on your loan. It also increases the house you can buy because the PMI is part of your housing payment.
But there are no down payment loans like USDA and VA loans. You should look into these loan products if you find that you just can’t save up enough for your down payment.
Get an Estimate from a Lender
The next step is to get an estimate (preapproval) from a lender. The estimate will give you an idea of how much home you can afford and what kind of interest rate you can expect.
Keep in mind that this is just an estimate. Your interest rate may be higher or lower, depending on your credit score and other factors.
But getting an estimate before you start shopping for homes is a good idea. That way, you’ll know how much home you can afford and avoid getting over your head.
Look Into Alternative Mortgage Products
If you don’t qualify, there are other options. There are other types of alternative mortgage products for low-income borrowers.
For instance, the USDA loan is primarily intended for low-income borrowers in rural areas. They have lessened restrictions, but they disqualify individuals above a certain income level.
Find a Home That Fits Your Budget
Once you know how much home you can afford, it’s time to start looking for a home that fits your budget.
Just because you’re approved for a certain amount doesn’t mean you must spend that much. You should only borrow as much as you’re comfortable with.
Talk to an agent. Show them your prequalification. Discuss your needs and wants. Their job is to find you the house that fits your budget.
You may not get your “dream home” in the first property that you buy, but that isn’t the goal. If you haven’t purchased a house yet, the goal is to get you into one so you can ride the wave of equity into the next property you want.
It’s not an easy process. But it’s something that you should really research before you decide that it’s “just not possible.” And, of course, if it is possible to increase your gross income, it can help.
Conclusion: Here’s How to Become a Homeowner
Low-income borrowers don’t need to stress. You can become a homeowner. The easiest path is to improve your credit and reduce your debts. You can purchase a home without debts through a low down payment program such as FHA, VA, or USDA loans.
Also, consider boosting your gross income through side jobs. Hobbies do count toward your income; anything on your tax return counts.
Talk to a lender about your situation. They aren’t just there if you’re “ready.” They’re also there to tell you what you need to do to get into the position you need to be in to achieve your goals.
Yes, you can purchase a house making $35,000 a year. However, you must have good credit and low debt to qualify for a mortgage. You may also need to find a low down payment product like an FHA loan. In many respects, the debt-to-income ratio is more important than raw income.
If you have good credit and low debt, you may be able to qualify for a mortgage making $40,000 a year. However, it will depend on the price of the house you’re looking to buy and your other financial factors. Because it’s so complex, you should always talk to a lender first.
You can afford a house if you make $30,000 a year. But you’ll need to have good credit and low debt. Work on your debt-to-income ratio and talk to a lender about your possibilities. You may be closer than you think!