How Much Home You Can ACTUALLY Afford (By Salary)

What's up, Graham? It's Guys here. So, have you ever wondered how much money you need to make to buy a house like this, or this, or even this? Well, wander no longer, because today we'll cover exactly how much income it takes to rent and buy the typical home at every price point, based on today's interest rates, record high prices, and lender guidelines.

Because chances are it's not going to be what you expect, and the final results are pretty surprising. Not to mention, I say all of this as someone who's worked full-time in real estate since 2008 as a real estate agent, real estate investor, landlord, and homeowner. So, I'll be able to give you some first-hand experiences into exactly what you could expect. And then at the end, we'll cover how much you would need to make to one day buy a home like this if you're curious.

Although before we go into that, if you'd like to see more of these "what could I afford" videos, do me a quick favor and hit the like button. It gives me a really good indication if these are the types of videos you'd like to see more of, and it just really helps out the algorithm. So if you wouldn't mind, thank you so much for subscribing; that helps too. Thank you so much, and now let's begin.

Alright, so it's a bit of a background. When it comes to housing expenses, it's important to understand that there is a huge difference between buying and renting. As you're about to see, the costs are going to be substantially different depending on which route you decide to go. For example, there's a saying out there that goes something like your rent is the most you'll ever pay each month, and your mortgage is the least you'll ever pay.

And as anybody in the industry will ever tell you, that's very much true. Anytime you rent, the payment is the payment. There aren't going to be any surprise city assessments, supplemental property tax bills, insurance premiums, or foundation repairs that could empty your bank account in a moment's notice. Whereas when you buy, oh boy, where do I even begin?

Well, to start, you have the mortgage. In most cases, this is broken down between a mix of principal and equity amortized over a term of 15 to 30 years, at which point after that, the home is paid off in full if you have a fixed interest rate. This means your payment's not going to change and will stay the same throughout the entire term of the loan. So from this perspective, yeah, it is kind of similar to renting, except unfortunately, it doesn't stop there.

Second, when owning, you also have property taxes. This is typically based as a percentage of the purchase price, and it usually ranges anywhere from 0.4 percent to all the way to 2 percent of the property's assessed value every single year. However, it's important to realize that this amount often readjusts on an annual basis as property values go up. And if you happen to live in an area like Texas, that could mean senior property taxes suddenly jumped by 50 to 100 percent in a few years.

Third, you also have insurance costs. See, anytime you own a property, your lender requires you to have a comprehensive insurance policy for anything that might possibly happen, like a car driving into your rental property. Fourth, you then also have repairs. This might include repairing an AC unit, fixing a water heater, spraying for termites, and all the other fun stuff that comes along with home ownership.

In terms of how much all of this stuff costs, some people use what's called the one percent rule, which says you'll spend one percent of the property's value every single year on repairs. While other people use the one dollar rule, which says you'll spend one dollar for every square foot of livable space every single year. And finally, fifth, you have other. This one's a bit more difficult to calculate, but it generally encompasses anything like potential HOA costs, landscaping upgrades, routine cleaning, and every other part of home ownership that you never really think of until you check your credit card statement.

Because of that, the cost of owning is usually substantially higher than that of renting, and as a result, it'll impact what you can afford. So if you're curious how much you need to make in order to get the typical home here in the United States, this is your answer.

To start, we could get the easy part out of the way, and that would be renting. Since this is a fixed cost, the general rule of thumb is that your rent should not exceed 30 percent of your gross income before taxes. This means if you make forty thousand dollars a year, your rent should not exceed a thousand dollars a month. If you make eighty thousand dollars a year, your rent should be two thousand dollars a month. If you make a hundred and sixty thousand dollars a year, that should be four thousand dollars a month. You get the idea.

However, this rule of thumb was created in a 1969 amendment to public housing before things like record student loan debt, 700 auto payments, and pay-as-you-go mobile games. So because of that, there could be a few slightly more accurate guidelines suggested for today's cost of living, like the 50/30/20 budget, which recommends that you spend no more than 50 percent of your take-home pay after taxes on needs like housing, food, and transportation, 30 percent of wants like clothing, travel, and hobbies, and 20 percent on additional savings and debt repayment.

With this, your entire financial picture is taken into consideration, with a little savings built in. Although that probably means you'll spend less than 30 percent of your income on housing, which could be a bit of a challenge. For instance, just consider that in states like New York, residents are spending up to 70 percent of their income on housing.

This is why I personally take the approach of what I like to call backwards budgeting, where you first take into account all of your fixed, non-negotiable costs like debt repayment, food, insurance, transportation, and everything else you can't possibly live without. Include 15 to 20 percent as a buffer for savings, throw in 10 for discretionary expenses, and then allocate whatever is left over for rent after taxes. For some people, this could be 15 percent; for others, it could be 25 or 30 percent.

But at least this puts you in the mindset of saving first, spending second, which long-term is going to help you out a ton, especially if one day you want to buy a house. Or, I guess if you just want a simpler answer, ideally, you should keep your rent below 20 percent of your gross income before taxes if you want to maintain a healthy savings.

This means if you want to rent this house for twenty-eight hundred dollars a month, you should make anywhere from 110 to 170 thousand dollars a year. Or how about this house in Fresno? You should make anywhere between 140 to 210 thousand dollars a year. Where this house in Venice Beach? Well, you better be making anywhere between 600 and 900 thousand dollars a year.

Of course, just keep in mind that these are general guidelines, and there's nothing that says you can't split this cost with a partner, live with roommates, or spend a different amount. But all things considered, 20 to 30 percent of your income is the amount that most people tend to abide by when it comes to spending money on rent.

The second, when it comes to buying a home, each rule tends to be a bit different. But the first is what's called the 20/28 rule. This states that you should spend no more than 28 percent of your gross monthly income on your mortgage payment, which includes property taxes and insurance. To calculate this, just take your monthly income, multiply that by 0.28, and voilà, that's how much your payment should be, which is enough to buy a home in the 215,000 range with twenty percent down at a six and a half percent interest rate.

Of course, if you're disappointed that a sixty thousand dollar salary is only enough to afford a two hundred thousand dollar home, you're not alone. And if you want something to blame, it's interest rates. Just consider that when mortgage rates were at three percent, the typical sixty thousand dollar income was enough to buy a home in the three hundred fifteen thousand dollar range. But now, with costs having increased, that final number is significantly lower.

That's why under the 28 percent rule, you would need to be making 138 thousand dollars a year to buy a five hundred thousand dollar home, two hundred and twelve thousand dollars a year for a seven hundred and fifty thousand dollar home, and two hundred and seventy-six thousand dollars to purchase a one-million-dollar home, each assuming a twenty percent down payment.

It now obviously these are just guidelines, and a lender would be able to approve you for a lot more than this. But this is only the very beginning because there is another strategy that's very commonly used, and that would be what's called the 30/33 rule. As you probably guessed, there are three main points to follow. It's the first of which being no more than 30 percent of your gross income before taxes should go toward your mortgage payment, including property taxes and insurance.

Just like the last strategy, this means that if you make seventy-two thousand dollars a year, you'd be able to spend eighteen hundred dollars a month on your payments, which would buy you something worth about two hundred twenty thousand dollars. Now, the second thirty percent rule is that you have at least 30 percent of the home's values saved up in cash or semi-liquid assets. The reason for this, you might ask? Well, this strategy recommends that you make at least a twenty percent down payment and keep another 10 on the sidelines in cash, just in case something inevitably breaks.

Personally, I tend to agree with this because a 20 down payment usually gives you the best terms and interest rate with the bank. It lowers your monthly payment, gives you a bit more equity in the house just in case the market goes down, and having some cash on the sidelines is a must because things will always go wrong.

Finally, the third part of the rule suggests that you do not buy a house that costs more than three times your annual income. This means if you make seventy-five thousand dollars a year, you keep your budget to 225 thousand. If you make a hundred fifty thousand dollars a year, that's four hundred fifty thousand. If you make two hundred thousand dollars a year, it's six hundred thousand. The list goes on.

Now, obviously, all of this depends on your location, and if you live on the West Coast, well, it might be impossible because people routinely spend more than ten times their annual income on housing. But as a rough rule of thumb, this can work and does work if you want to play it safe.

To me, this 30/33 rule is probably one of the safest, most conservative routes you could take when it comes to home ownership because it ensures that you don't take on too much before you're able to afford it. However, in terms of what a lender looks for and how much you could actually get, it's quite different.

So here's what you need to know in terms of how much you can afford. Lenders usually only care about two things, and that would be income and debt. The income part is pretty straightforward: it's simply how much money do you make every month? Do you have stable employment, and do you have one to two years of tax returns? If the answer is yes, well, this part's pretty well handled.

However, the next part of debt is a little bit more complicated. See, anytime you qualify for a mortgage, lenders will look at what's called your debt-to-income ratio, which calculates how much money is left over after your expenses. In this case, most banks want a debt-to-income ratio below 45 percent, which means less than 45 percent of your take-home pay goes towards paying off your debts, including your mortgage.

So as a quick example, if you're making eight thousand dollars a month, a lender would look at that and give you up to thirty-six hundred dollars a month to be used towards all of your debts. In this case, if you have a $500 student loan payment, a $700 car payment, and a $100 credit card payment, that leaves you with twenty-three hundred dollars a month left over to spend on housing, which buys you something in the three hundred fifty-thousand dollar range, assuming you put 20 down.

Since lenders use this debt to qualify payments, any outstanding loans you have will reduce the overall amount and will work against you. So if you have no other debts and just want to use your full income towards housing, they'll give you the entire $3,600 a month to use, which would get you something in the five hundred fifty-thousand dollar range.

Does that mean it's a good idea to spend more than five times your annual salary on a home? Probably not, but a lender will give it to you. And this means if you have no other debts and you want to buy an eight hundred thousand dollar home, you'll need to make about twelve thousand dollars a month. If you want to buy something for 1.2 million dollars, you need to make about eighteen thousand dollars a month. And if you want to buy a two million dollar house, you're looking at about thirty thousand dollars a month in income.

Of course, keep in mind that these are just estimates that most lenders will look for in addition to other things, like having a good credit score and twenty percent down. But if you want my thoughts on how you could best do this, here's what I think.

Now personally, when it comes to myself, I'd first take a look at the overall cost of renting versus buying, and I'd ask myself what makes more sense financially. Right now, you might be surprised to learn that in all but four major metros, renting is cheaper than buying. In fact, Redfin said that nationally, the typical home costs an estimated 25 percent more per month to own than rent. This means financially, you could be better off renting and not buying right now, at least in the short term.

Otherwise, you're spending more than you need to just for the privilege of calling yourself a homeowner. Frankly, as a homeowner myself, I'll tell you, unless I get a low interest rate to find a really good deal or invest in an area that I think is going to be worth substantially more in the next 10 years, I think renting is the underappreciated choice. And if patience is on your side, you may as well wait until you find a good deal or a home that you could see yourself living in for at least another 10 years.

At that point, maybe buying can work. If anyone wants a good calculator to determine all the variables, I highly recommend the New York Times buy versus rent website in the description. This takes into account every single variable that you can ever even think of, and within a few minutes, you can determine how much your home would cost, even including the opportunity cost of your down payment. It's pretty incredible.

Second, if you're gonna buy, at least do your part to shop lenders to get a low interest rate, negotiate with the seller, don't be afraid to do some minor cosmetic work yourself, and only make a purchase that you intend on keeping long term. Yes, owning is incredibly expensive right now, but it is possible through diligent savings, patience, and research, especially if you know upfront how much it's going to cost and exactly how much you need to make in order to afford it.

Oh, and by the way, are you curious how much it takes to afford something like this for 65 million dollars? Well, if to start, you would put 20 percent down, which works out to be 13 million dollars, and then you'd be left over with a 52 million dollar mortgage, which would cost you three hundred and ten thousand dollars a month. You'd also have property taxes at a hundred and ten thousand dollars a month, insurance for another ten thousand dollars a month, and we'll throw in another ten thousand dollars a month for random miscellaneous expenses, bringing your total out-of-pocket cost to 440 thousand dollars a month.

Using the 30/33 rule, you'd have to have an income of 1.4 million dollars a month or 16.8 million dollars a year in order to afford it. Or if a lender allows you to take on a maximum of 45 percent debt to income, you could also afford this home and qualify for it with 11.5 million dollars a year.

Although realistically, whoever buys this house is probably just going to pay for it outright in cash. So with that said, I'm off to buy a lottery ticket. With that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and if you want some free stocks down below in the description, I do have an affiliate link so you can get some free stocks and use that towards buying your first house if you want to.

So thank you guys so much, and until next time.