I Make 25k a Year, Can I Buy a House? This is How To Do It

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Mike Romano

Apr 19, 2023

Mike Romano is a mortgage industry veteran with over 20 years of experience. His expertise spans mortgage technology, credit risk, and loan origination, and he has spoken at many mortgage and fintech conferences. He has a Bachelor's and MBA from the University of California, Berkeley and currently resides in Austin, TX. NMLS # 2515901

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    Buying a house on $25,000 a year can understandably feel like a long shot, so “I make 25K a year, can I buy a house?” is a completely legitimate question. 

    The upfront costs of buying a home can be steep, and then there’s the long-term budgeting to work out. However, there are down payment assistance programs that can help you with upfront costs. Some down payment assistance programs can even help keep your monthly housing expenses down.

    Of course, understanding if you can buy a house with a $25,000 income goes a bit deeper than just down payment and monthly payment numbers. We’ll go over all the variables in this article, so you have a thorough understanding of if — and how — you can buy a home with a $25K annual salary. 

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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.

      Can I buy a house if I make 25K a year?

      Yes, you can buy a house if you make 25K a year. But purchasing a home on any income takes planning. You first need to understand how banks assess whether or not they’ll give you a mortgage loan, what down payment assistance is available, and other factors that influence your ability to buy a house.

      If I make 25K a year, how much house can I afford to buy?

      Okay. So you can buy a house if you make 25K a year. But exactly how much house can you afford on that salary? 

      Most financial experts advise against putting more than 40% of your monthly income toward your mortgage payments, with 40% being on the far upper end. The general rule of thumb is to keep your mortgage payment between 25-33% of your total monthly income. 

      Here’s what that looks like if you make 25K a year:

      • 25% of your monthly income: About $521 total monthly mortgage payment
      • 33% of your monthly income: About $688 total monthly mortgage payment
      • 40% of your monthly income: About $834 total monthly mortgage payment
      • 50% of your monthly income: About $1042 total monthly mortgage payment

      These numbers represent your total monthly mortgage costs, including taxes, homeowner’s insurance, and homeowners association fees (if applicable.) Make sure you account for those expenses when you decide how much house you can afford to buy.

      Exactly what percentage of your income you dedicate to your monthly mortgage payments will depend on your other expenses. (We’ll cover that in the next section when we talk about debt-to-income ratio.)

      But if you make 25K a year, here’s how much house you can afford to buy if you have no other debts.

      Annual Salary$25,000$25,000$25,000
      Down Payment$5,000$15,000$25,000
      Existing Monthly Debts000
      Mortgage Interest Rate7.322%7.322%7.322%
      25% monthly income
      for mortgage payments
      33% monthly income
      for mortgage payments
      40% monthly income
      for mortgage payments

      These are rough numbers. They’re based on a standard 30-year mortgage, but there are other types of mortgages available as well. Also, interest rates change often and tax rates vary based on your location. 

      The exact amount of house you can afford to buy if you make 25K a year will depend on all of these factors, so always talk to a mortgage broker before making any financial decision related to buying a house. 

      Debt to income ratio and how it affects what you can get on 25K

      Your income is one of the first things a bank loan officer looks at when you apply for a home loan. After that, they look at your debt-to-income ratio. Your debt-to-income ratio is a single number that helps banks quickly assess how much of your income goes to pay existing debts.

      In a minute, we’ll show you how to calculate your debt-to-income ratio, but the general explanation is that a lower debt-to-income ratio is better.

      The higher your debt to income ratio, the more of your income is dedicated to paying down debt. Even though a house is a smart purchase, a mortgage loan is still a debt. That’s why loan officers look at your debt-to-income ratio when they consider you for a home loan.

      How to calculate your debt-to-income ratio

      Your debt to income ratio essentially shows what percentage of your income is dedicated to paying off debts. You find this number by dividing your monthly debts by your monthly gross income.

      Debt-to-income ratio = Total monthly debts / gross monthly income 

      A $25,000 salary delivers about $2,085 in gross monthly income. Therefore, you’ll most likely be dividing your total monthly debts by $2,085. You’ll get a number between 0 and 1 when you perform this calculation.

      The 28/36 rule

      One more number to keep in mind is the 28/36 rule. 

      Your debt-to-income ratio is important because mortgage lenders use it when they decide how much money to lend to you. But in terms of day-to-day personal budgeting, the 28/36 rule is more useful. 

      Many experts recommend capping monthly mortgage payments at 28% of your gross monthly income and total debt payments (including your mortgage and any other debts) at 36% of your gross monthly income.

      If it’s still not exactly clear, a few examples will make this easier to understand. 

      Buying a home when you have debt: 3 examples

      These examples use real debt numbers to put debt-to-income ratio in a relevant context and give you a few real-world debt-to-income ratios. 

      Keep in mind that your debt-to-income ratio is based on your total debt. If you have multiple debt payments each month, add all of those payments together and divide that number by your monthly income to get your debt-to-income ratio.

      Example 1: Debt-to-income ratio with student loans

      Graduates with associate and technical degrees pay an average of  $196 a month on student loan debts. Based on a $2,085 gross monthly income, $196 in student loan payments would give you a debt-to-income ratio of 0.094.

      $196 student loan payment / $2,085 gross monthly income = 0.094

      This 0.094 debt-to-income ratio tells loan officers that 9.4% of your monthly income goes to pay existing monthly debt payments.

      Capping your total debts at 36%, this is your home buying budget:

      Home Budget With
      Student Loan Debt
      Annual Salary$25,000
      Down Payment$15,000
      Student Debt$196
      Mortgage Interest Rate7.322%
      Monthly Mortgage Payment$436
      Home Purchase Budget$78,500

      Example 2: Debt-to-income ratio with a car payment

      The average car payment for a used vehicle is $526. On a $2,085 gross monthly income, this average car payment would give a debt-to-income ratio of 0.25.

      $526 car payment / $2,085 gross monthly income = 0.25

      This means that the average car payment requires 25% of your monthly income.

      Capping your total debts at 36%, this is your home buying budget:

      Home Budget With
      Car Payment
      Annual Salary$25,000
      Down Payment$15,000
      Student Debt$526
      Mortgage Interest Rate7.322%
      Monthly Mortgage Payment$171
      Home Purchase Budget$39,900

      Example 3: Debt-to-income ratio with rent payments

      Although rent is not technically debt, loan officers do look at your current rental payments. 

      Loan officers understand that you won’t need to continue paying rent once you own a house. However, they do take current rent payments into account because rental payments can impact your credit score, and your new mortgage payment will be debt.

      Your rental payments can work in your favor if you’ve consistently made your rent payments on time and your mortgage payments will be lower than your current rent payments, because your mortgage payments will actually make your debt-to-income ratio better.

      The average rent payment for a two-bedroom apartment in the U.S. is $1,320. On a monthly income of $2,085, this produces a debt-to-income ratio of 0.63.

      $1,320 rent payment / $2,085 gross monthly income = 0.63

      That’s 63% of your income dedicated to rent. It’s totally possible that your mortgage payment would be lower than that, if you get some down payment assistance.

      Best down payment assistance for a 25K salary

      The down payment can be the biggest challenge in buying a house, especially on a limited income. Fortunately, there are down payment assistance programs to help you cover this initial lump sum payment.

      Some down payment assistance programs can even be used to buy down your interest rate and pay other closing costs. Additionally, between national and state down payment programs, there are down payment programs available to home buyers everywhere.

      National programs

      There are national down payment assistance programs available from both government and private organizations. There are both loans and grants available nationally. At some point, there may be a federal tax credit for home buyers from Biden’s $15,000 first-time homebuyer tax credit.

      Additionally, the Biden Downpayment Toward Equity Act may offer a $25,000 federal grant to buyers purchasing their first home. Corporations also offer nationwide programs, such as the Bank of America Home Grant Program and the Bank of America Down Payment Grant Program.

      However, there are generally more state programs available than national programs.

      State programs

      State down payment assistance programs tend to be more numerous than national programs because state, county, and city governments often offer or sponsor down payment programs. Private organizations also offer more programs that are targeted at specific areas.

      For instance, the City of Boulder offers a grant to buyers in Boulder, Colorado which offers up to 5% of the home purchase price in down payment assistance. The Colorado Housing Assistance Corporation offers a loan for up to $20,000 to cover down payment and closing costs for Colorado home buyers.

      There are programs like this in every state. This means you have far more options for down payment assistance than you may realize.

      Stairs can help you find the best down payment assistance programs available in your area. Learn more

      Can I buy a house with $25,000 income where I live?

      You may be able to buy a house with $25,000 income where you live, so long as you’re willing to relocate at least a bit. Clearly, some places are more affordable than others. Even the cheapest states to buy a house have expensive and inexpensive areas.

      The reasons some states are more affordable than others and some areas within each state are more affordable than others are numerous. 

      For example, Hawaii is one of the most expensive states to buy a house because there’s very limited space to build houses in Hawaii, so there’s an incredibly limited supply of housing. On the other hand, California is expensive because they have higher state tax rates.

      However, even in expensive states, there are less expensive areas. There are likely affordable areas relatively close to where you’re currently living. With a bit of searching and down payment assistance, you may be able to afford a house close to where you live.

      Tips for buying a home when you earn 25K a year

      Buying a home on a limited income is possible. But you’ll need to do a bit of preparation and make sure you understand all the potential home buying costs, so you’re not surprised by anything.

      Manage your existing debt

      As you may have guessed based on the debt-to-income ratio section from earlier in this article, managing your existing debt is very important for getting a home loan. Paying down debt is a surefire way to improve your current debt-to-income ratio.

      However, there are things you can do to help lower your debt-to-income ratio faster. You can negotiate a lower interest rate on credit cards, if you have credit card debt. Student loan payments can be restructured. Car payments can also be refinanced to a lower interest rate.

      While these tactics won’t eliminate debt altogether, they can improve your debt-to-income ratio by lowering your required debt payments, which will help you get approved for a mortgage loan even before you’ve fully repaid your existing debt.

      Understand how your credit score affects interest rates

      Your credit score impacts what interest rates you qualify for. A better credit score qualifies you for lower interest rates, which means you get lower monthly mortgage payments and you pay less interest over the life of your mortgage loan.

      Also, down payment assistance programs typically require a minimum credit score between 600 and 640. A better credit score gives you more access to down payment assistance.

      You can get your credit score for free, but it’s wise to get your most accurate credit report from MyFICO or Experian. It’s not free, but it gives you the best information and shows you what might be bringing your credit score down so you can start improving it. 

      Predict additional home buying costs

      Nobody likes surprise costs. There are expenses involved with buying a house that go beyond the price of the house and the mortgage interest. If you know about these costs, you can ask about them ahead of time, and you won’t be surprised once you’re deep into the buying process.

      Property taxes

      Your property taxes usually get paid as part of your mortgage payment. However, it’s important to factor these in when you calculate your monthly payments. 

      A good real estate professional will include property taxes in any monthly payment calculation. But, when you’re doing your homework to determine how much house you can afford before you call a real-estate agent, make sure you factor in state and local property taxes.

      Homeowner’s insurance

      Homeowner’s insurance costs vary from location to location. Homeowner’s insurance in areas which are prone to natural disasters and other damaging events are usually higher.

      Like property taxes, your homeowner’s insurance can be wrapped up in your mortgage payment. Also similar to property taxes, it’s important to find out how much homeowner’s insurance costs in your area and factor that into your back-of-the-envelope calculations.

      Private mortgage insurance (PMI)

      Private mortgage insurance (PMI) is required if you make a down payment which is less than 20% of the home price. This is why many financial experts recommend putting down at least 20% when you purchase a home.

      The good news is that you can request to stop paying private mortgage insurance once you have 20% equity in your home, and most private mortgage insurance automatically cancels once you have 22% equity. 

      Homeowners association (HOA) fees

      Not all homes are within the bounds of a homeowners association (HOA). Homeowners associations charge fees, which need to factor into your mortgage payment calculations. Make sure you check to see if a home is part of an HOA early in the buying process so you can anticipate any HOA fees.

      Learn more: Are you expecting your income to increase? Find out how much home you can afford if you make $70,000 a year.

      Down payment assistance opens the door to home ownership

      The down payment is what keeps most people from buying a home now. If you make $25,000 a year, down payment assistance can reduce your timeline for buying a home by a matter of years. 

      Unfortunately, it’s challenging to get information on all the down payment programs, which means you could be missing out on great home buying opportunities.

      Until now.

      With Stairs Financial, you can easily find out exactly which down payment assistance programs are available to you, so you can 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.

      Where do you want to buy?
        Search by ZIP code, address, city, county, or neighborhood
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