# Can I Buy A House Making 40k A Year? How Much House Can You Afford To Purchase?

If you are earning 40k a year then it is possible to buy a house. If you want to buy a home with 40k a year then your monthly mortgage-related payments at 28% of gross income are \$933. Moreover, your debt payments should not exceed 36%, and it would be \$1,200 per month. Also, homeownership has now become more accessible than ever thanks to low-down-payment loans and various down payment assistance programs.

## Key Takeaways

• If you are making 40k a year then you can afford a house anywhere from \$180,000 – \$300,000
• You can use the 28% Front-End Ratio, The 36% Rule, Special HFA Rules, etc. to find out how much you can afford for your dream house
• Multiply your gross income by 2.5 or 3 and you will get the maximum value of the home that you might afford
• For the FHA loan, you must have a FICO score of 500 – 580
• If your FICO score is 580 or more then your down payment will be 3.5%

## 5 Ways To Calculate How Much House You Can Afford

There are 5 effective ways available to calculate how much you can afford. They are –

1. Multiply Your Annual Income By 2.5 or 3

2. The 28% Front-End Ratio

3. The 36% Rule

4. Special HFA Rules

5. The Dave Ramsey Mortgage

### 1. Multiply Your Annual Income By 2.5 or 3

This is a very common way of calculating how much house you can afford. In fact, it was the basic rule of thumb for many years. This is a very easy process, simply take your gross income and multiply it by 2.5 or 3 and you will get the maximum value of the home that you might afford. For example, if you are making 40k a year then you might be able to purchase a new home with a price somewhere between \$100,000 and \$120,000. However, you should keep in mind that this is a very general rule of thumb and many factors will influence the actual result.

For an instant, if you can lower the interest rate then you will be able to afford a home of higher value. Therefore, your credit score is very important because having a good credit score will allow you to take a home loan with a low-interest rate. For example, if your credit score is 760 or higher then you could get a loan with an interest rate that is 1.5% lower. If you can get a 1.5% lower interest rate then it might save you tens of thousands of dollars over the mortgage duration.

### 2. The 28% Front-End Ratio

The housing-expense-to-income ratio is a very important factor when you are applying for a home loan and it is mostly known as the front-end ratio. When the bank checks your loan application they mostly emphasize the front-end ratio. To determine the front-end ratio, the bank usually projected the housing expenses of the home that you want to buy and then divided the amount by your total monthly income. Usually, banks or mortgage companies look for a ratio of 28% or less. For example, if your monthly income is \$10,000 a month then according to the 28% front-end ratio your total housing expenses must not exceed \$2,800 each month. Moreover, it also means that your mortgage payment, property taxes, PMI, and homeowner’s insurance, all must remain below the 28% threshold.

### 3. The 36% Rule

If your housing-expense-to-income ratio is 28% or less then you have to overcome another hurdle and it’s the debt-to-income ratio. The debt-to-income ratio is also known as the back-end ratio. To calculate the debt-to-income ratio, you have to divide the total monthly minimum debt payments by your gross income. The back-end ratio is used in conjunction with the front-end ratio that I have discussed above. Both the front-end and back-end ratios give lenders a holistic view of your financial situation. These two ratios help them to make a clearer decision of whether or not you’ll be approved for the mortgage loan.

You should understand that all sorts of debt payments are taken into account for the back-end ratio. The debt payments include projected mortgages, minimum credit card payments, auto loans, student loans, and any other payments on debt. If you have child support payments then it will also add to the debt ratio. When you apply for a home loan, a bank and mortgage company look for a back-end ratio of no more than 36%. Below is a chart that shows the calculations for various income levels:

### 4. Special HFA Rules

The government has set special rules which are known as FHA mortgage and according to this rule, for the mortgage payment expense-to-income ratio (front-end), the percentage cannot be greater than 29%. On the other hand, the back-end ratio can not be more than 41%. Here are the FHA loan requirements –

1. FICO® score at least 580 = 3.5% down payment

2. FICO® score between 500 and 579 = 10% down payment

3. MIP (Mortgage Insurance Premium) is required

4. Debt-to-Income Ratio < 43%

5. The home must be the borrower’s primary residence

6. The borrower must have a steady income and proof of employment

### 5. The Dave Ramsey Mortgage

Dave Ramsey gives an excellent method for home-buying. If you can follow this method then you can easily buy a new home. If you have to take a mortgage to buy a home then according to Dave Ramsey you should finance your home with a 15-year mortgage rather than a 30-year mortgage. Moreover, your mortgage payment should be no more than 25% of your take-home pay and you should give at least a 20% down payment for your home. Furthermore, you should ensure that you have the income to handle the mortgage payments. Here is a table that shows your maximum monthly payment according to the Dave Ramsey approach to mortgages –

## How Much worth House Can You Afford Making 40k A Year?

You can afford a house making 40k a year. In fact, you can afford a house anywhere from \$180,000 to nearly \$300,000. You should know that salary is not the only variable that determines your home-buying budget. You should consider your credit score, current debts, mortgage rates, and many other factors to know how much house can you afford. Let’s check the below examples to know how much these variables can affect your home buying power.

## FAQs About Can I Buy A House Making 40k A Year

### Can I Buy A Homemaking 40k A Year?

Yes, you can buy a house earning 40k a year. If you can manage to keep your debt-to-income ratio at 40% or less then you will be qualified for a mortgage loan.

### How Much Do I Need To Make To Buy A \$200K House?

If you want to buy a \$200k house then you must have to give a down payment of \$40,000. Therefore, you would need to earn \$29,843 per year before tax.

### How Much Mortgage Can I Get For \$500 A Month?

With a total monthly payment of \$500 per month, you might get a mortgage worth \$72,553 with a loan term of 20 years and an interest rate of 4%.

### How To Increase The Home Buying Budget By \$40K A Year?

Below are some tips that you can follow to increase your home buying budget to \$40K a year. They are –