How Much House Can I Afford on 40K a Year? Calculate the Cost

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Malcolm-Wiley Floyd

May 10, 2023

CEO and Co-Founder of Stairs Financial, a YC-backed startup that connects first-time home buyers with down payment assistance programs across the US. Malcolm-Wiley studied economics at Harvard and is a licensed mortgage broker.

Although buying a house with a $40,000 yearly salary is totally manageable, answering the question, “How much house can I afford on 40K a year?” requires a little calculation and planning.

Fortunately, calculating how much you can reasonably spend on a house isn’t super complex. 

We’ll teach you how to factor in your existing debt, settle on a down payment amount, and land on a housing budget you can reasonably afford with a 40K salary. We’ll also show you how to use down payment assistance to increase your home purchase budget and get more house for your money.  

Stretch your home buying budget with down payment assistance

Making a larger down payment is a powerful way to increase how much house you can afford, no matter your salary. You might qualify for help to reach your goal sooner.

Find up to $15,000 towards a home 🏠

Compare local down payment assistance and find a mortgage, fast.

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    Disclaimer: This article is for informational purposes only and should not be considered as legal or financial advice. Please consult an attorney, mortgage lender, or CPA for guidance on your specific situation.

    How much house can I afford on 40K a year?

    If you have minimal or no existing monthly debt payments, between $103,800 and $236,100 is about how much house you can afford on $40K a year. Exactly how much you spend on a house within that range depends on your financial situation and how much down payment you can afford to invest.

    Annual Salary$40,000$40,000$40,000
    Down Payment$5,000$15,000$30,000
    Existing Monthly Debts$0$0$0
    Mortgage Rate7.287%7.287%7.287%
    Home Purchase Budget
    (25% monthly income
    on mortgage payments)



    Home Purchase Budget
    (28% monthly income)
    Home Purchase Budget
    (36% monthly income)
    Home Purchase Budget
    (40% of monthly income)
    Home Purchase Budget
    (50% of monthly income)

    Numbers based on a standard 30-year mortgage and no additional debts.

    As you can see, there is a broad range in terms of how much house you can afford on 40K a year. This is because the amount you can spend is influenced by several other factors: 

    • Debt-to-income ratio
    • Down payment amount
    • Down payment assistance
    • Region where you live

    The good news is that you can significantly narrow this range with a few pieces of financial information.

    How much can I spend on a house if I make $40,000 a year and have other debts?

    When loan officers consider how much their organization is willing to lend you, they look at your debt-to-income ratio. This ratio shows them what percentage of your monthly income goes toward making monthly debt payments.

    This is a useful metric for loan officers, and it’s a helpful way for prospective homeowners to understand how lenders make their decisions. However, when it comes to your own planning and budgeting, it’s more useful to think in terms of the 28/36 rule.

    The 28/36 rule 

    A simple, yet powerful, way to figure out how much of your monthly income you can dedicate to making a mortgage payment is to follow the 28/36 rule.

    The 28/36 rule comes from personal finance experts. It just means you should limit your mortgage payments to 28% of your monthly income and your total debt to 36% of your monthly income.

    Of course, this rule isn’t written in stone. It can be flexed a bit, depending on your specific financial situation. However, it’s an excellent guideline and starting point for figuring out what house you can afford with your 40K a year salary. 

    With this rule and a bit of arithmetic, you can determine a much more specific home purchase budget.

    Using the 28/36 rule to calculate your home purchase budget 

    When you’re calculating your home purchase budgets with debts, the most important thing to understand is that your mortgage payment is counted toward your total monthly debt payments. A mortgage might be good debt, but it’s still debt and must be treated as such for budgeting purposes.

    If we’re following the 28/36 rule, your mortgage payment with a 40K salary tops out at $933 each month, and your other debts are capped at $267.

    But as we said before, there is some flexibility to this. Here are a few examples to show you what we mean: 

    Home affordability with student loans
    Annual Salary$40,000
    Down Payment$15,000
    Student Loan Payment$267
    Debt-to-Income Ratio0.0801
    Mortgage Rate7.287%
    Monthly Mortgage Payment$933
    Home Purchase Budget$127,600

    The 28/36 rule might seem a bit restrictive, the average student loan payment for graduates with bachelor’s degrees in the U.S. is $267, which matches up exactly with the 28/36 rule if you make $40K a year.

    Home affordability with credit card debt
    Annual Salary$40,000
    Down Payment$15,000
    Credit Card Payment$110.50
    Debt-to-Income Ratio0.0332
    Mortgage Rate7.287%
    Monthly Mortgage Payment$1,089.50
    Home Purchase Budget$147,900

    Credit card debt is also common for Americans, but the average credit card payment is just $110.50. In this case, you could increase your home buying budget by flexing your mortgage payment to a bit more than 28% of your monthly income while still capping your total debt payments at 36%. 

    Home affordability with a car payment
    Annual Salary$40,000
    Down Payment$15,000
    Car Payment$526
    Debt-to-Income Ratio0.1578
    Mortgage Rate7.287%
    Monthly Mortgage Payment$674
    Home Purchase Budget$107,100

    At the other end of the spectrum, the average used car payment is $526. In this case, you’d have to push your mortgage payments below 28% of your monthly income to maintain the 28/36 split.

    However, you could increase your total monthly debt payments to more than 36% of your monthly income, if that works for you. Certain types of home loans, such as FHA loans, allow up to 50% of your total monthly income to be dedicated to making debt payments. 

    The house purchase budget in some of these scenarios is likely a bit rough, depending on where you live. Paying down existing debts or increasing your income are smart things to do. However, these solutions have long timelines.

    Another viable option is to increase the amount of down payment you invest. A larger down payment is the best solution to a tight home buying budget, if you want to buy a house before you raise your income or pay off your other debts. 

    What about if I make a larger down payment

    Making a larger down payment is an incredibly efficient way to increase your home buying budget. This is where down payment assistance (DPA) is incredibly valuable, as it can significantly increase your home purchase budget. (We’ll talk more about your DPA options in a minute.) 

    Calculating your home purchase budget without down payment assistance

    Here’s what your home buying budget might look like without down payment assistance, even if you’re able to save up to make a reasonable down payment:

    Annual Salary$40,000$40,000
    Down Payment$0$5,000
    Mortgage Rate7.287%7.287%
    Mortgage Payment
    (28% monthly income)
    Home Purchase Budget$104,775$109,500

    Calculating your home purchase budget with down payment assistance

    On the other hand, your purchasing power increases significantly if you take advantage of DPA:

    Annual Salary$40,000$40,000
    Down Payment$15,000$25,000
    Mortgage Rate7.287%7.287%
    Mortgage Payment
    (28% monthly income)
    Home Purchase Budget$127,600$138,900

    As you can see, increasing your down payment by $15,000 increases your purchasing power by more than $15,000, and increasing your down payment by $20,000 increases your budget by notably more than $20,000.

    Getting $15,000 or $20,000 in DPA might seem like a stretch, but there are down payment assistance programs sponsored by state governments, local governments, and private organizations which offer thousands or even tens of thousands in help.

    There’s even a $25,000 federal first-time buyers grant which could be passed into law in the coming years.

    Many of these DPA programs can be used in combination with other assistance. Therefore, it’s totally possible to make a $15,000 or even $25,000 down payment with the right amount of help. 

    If you’re struggling to figure out what down payment assistance you qualify for, Stairs Financial can help. Stairs connects you to qualified lenders who work with all the down payment assistance programs you might qualify for, then lets you compare your options side-by-side.

    Learn more about down payment assistance programs in your area.

    Before you purchase: Other housing costs to consider if you make 40K a year

    So far, we’ve shown you how to calculate the amount of house you can afford on $40K a year based solely on your monthly budget, debts, and down payment. However, there are a few other costs to factor into your monthly housing budget. 

    Here’s what to keep in mind.

    Property taxes

    In most cases, property taxes are paid each month along with your mortgage payment. You pay your lender one lump sum each month and the lender is responsible for passing your property tax payment on to your local government. 

    You likely won’t need to make any separate payments, but this does mean that your property taxes will increase your monthly mortgage payments, which changes your total home buying budget.

    Different states have different property tax rates, and they tax property differently. Fortunately, property taxes are relatively minimal, usually between one and five percent. Just make sure you understand your state and local property taxes and factor them in when you calculate your home purchase budget.

    Homeowner’s insurance

    Almost all lenders require homeowner’s insurance. The best way to manage homeowner’s insurance costs is to shop around for rates before you buy a house, and get insurance from the most affordable company when you make your purchase.

    If you don’t have any quotes on hand at closing time, you’ll likely have to get insurance from whatever company your lender partners with, which may not be the most affordable option for you.

    Private Mortgage Insurance (PMI)

    Private Mortgage Insurance (PMI) is required if your down payment is less than 20% of the purchase price of your home. This is another strong reason to get as much down payment assistance as you can and why most personal finance experts recommend putting at least 20% down when you buy a house.

    However, even if you can’t make a 20% down payment, PMI automatically cancels once you have 22% equity in your home. You can also request to have PMI canceled once you reach 20% equity in your home.

    Homeowners Association (HOA) Fees

    Living in a Homeowners Association (HOA) area can be pricey, as HOA fees tend to be quite high. If you have your heart set on a house that’s in an HOA, make sure you account for the fees when you work out your budget.

    Find out how much house you can afford if you make more than 40K

    Increasing your income is a sure fire way to increase your home purchase budget. If you’re anticipating a change in income, take a look at how much house you can afford on a higher salary. 

    How much house can I afford with:

    Get more house on any budget with down payment assistance

    For most households, making a down payment is the biggest obstacle to buying a house, even for those households that make more than $40,000 a year. This is frustrating, especially if you can afford the monthly payments on a house right now.

    Down payment assistance (DPA) solves this conundrum for many first-time homebuyers. Some DPA programs can even be used to cover other closing costs, make initial home improvements, or buy down your interest rate.

    The biggest issue with down payment assistance is that it’s incredibly difficult to get information about all the available programs.

    Until now.

    With Stairs Financial, you can easily find out exactly which down payment assistance programs are available to you, compare each program side-by-side, and make a more informed decision.

    Stairs connects you to qualified lenders who work with all the down payment assistance programs you might qualify for, then lets you compare your options side-by-side.

    Learn more.

    Find up to $15,000 towards a home 🏠

    Compare local down payment assistance and find a mortgage, fast.

      Search by ZIP code, address, city, county, or neighborhood
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