Whether you’re considering moving to another home or buying your first home, a $20,000 salary will open up options for what you can afford. Before signing a tour home or signing documents, it’s important to know that you’re looking for a home to buy in Portland or expect to buy it in Charleston, South Carolina.
Using Redfin’s mortgage calculator, you’ll be considering a home that’s under $820,000 with a current salary of zero debt, a 20% down payment and 36% debt revenue. Of course, this is a simple answer to a more complicated question. How much you can afford on a $20,000 salary depends on the various factors investigated in this Redfin Real Estate Article.
Factors that affect what you can afford:
What is your credit score?
Can I afford most of the down payment?
What is your debt-to-income ratio?
What is the current interest rate?
Where are you trying to live?
How much work do you need at home?
Conclusion: I know what you can afford
What is your credit score?
If you pay cash to your home, skip this section. The seller really doesn’t care about your credit score as long as he can pay the home in full. However, like most Americans, if you need fundraising to move to a new home, your credit score can play a big role in what you can afford.
Exception (800+): You are eligible for the highest rates available and you can choose a lender. Very good (740-799): These borrowers also tend to qualify for high-quality interest rates (670-739): This is where a slight increase in interest rates begins to appear, but this range is considered favorable. FAIR (580-669): Interest rates in this range may begin to increase further. Poor (below 579): If you are in this range, you can pay a lot of interest and secure a mortgage.
It’s fine if your credit score is heading towards the bottom edge of this range. There’s still so much you can do to improve it and save thousands of people with a mortgage. If you want to improve your credit score, make sure you pay your loan on time, don’t get too close to your credit limits, and don’t reduce your outstanding debt.
In short, a higher credit score will allow you to qualify for a better loan at a lower interest rate and you can afford a higher asking price home.
Can I afford most of the down payment?
The size of the down payment directly affects the amount of home you can afford with a $20,000 salary. If you can save on the coveted 20% down payment, you can avoid paying private mortgage insurance (PMI). Most lenders will need to purchase a PMI as their down payment is less than 20%. PMI is designed to protect lenders’ investments, but once the 20% down payment threshold is reached, you can abandon this extra cost.
The bigger your down payment, the more you often see cheaper monthly payments on your mortgage. Therefore, in many cases, it is best to suppress all your money as much as possible without tying it into your property.
Bottom line: If you can afford it and still have enough savings to cover the emergency costs, aim to pay a 20% down payment. The larger the down payment, the smaller the monthly mortgage payments.
What is your debt-to-income ratio?
The Debt Income (DTI) ratio is a way to compare monthly debt payments with monthly total income. Lenders use this ratio as a way to determine their ability to pay off their loans. High DTIs can improve mortgage rates, while low DTIs will increase your ability to manage your debt, making it even more advantageous for lenders. To calculate the DTI, follow the formula below:
dti = (Monthly debt payments/Monthly total income) x 100
Suppose you spend $1,400 a month on your credit card minimum, your car payments, and your student loan. My annual total income is $200,000, and my monthly total income is $16,666. So your DTI would look like this:
dti = ($1,400/$16,666) * 100 = 8.4%
This means that 8.4% of your income will pay back your monthly regular debt payments. While most lenders prefer DTIs below 36%, many lenders offer exceptions of up to 45% or 50% of FHA loans.
Use the 28/36 rule
You can get mortgage approval, but it is generally recommended to follow the 28/36 rule. The 28/36 rule states that up to 28% of your monthly total income must be spent on total housing expenses (mortgage payments, property taxes, homeowner insurance premiums, homeowner association fees).
Following the rules of 28/36, it may increase the likelihood of securing a mortgage at a favorable rate without risking defaulting on debt. When trying to decide how much you can afford for $20,000, it’s important to keep debt in mind. Lenders are careful and may affect the types of properties that can be considered in the price range.
In summary, we aim for a DTI of less than 36%. This means that 36% of your monthly total revenue is spent on paying your debt. Ideally, you’ll only need 28% of the total amount you spend on total housing expenses, but this can be promoted if you’re willing to budget a little more.
What is the current interest rate?
Even a small change in interest rates can mean thousands of payments or savings over the lifespan of your loan. Higher prices may limit your purchasing power, but lower prices may allow you to afford a more expensive home.
It’s easy to fall into the trap of waiting for “perfect” time. However, timing the market based on interest rates is risky and often unwise. The best time to buy is when you’re financially ready. If fees drop later and credits continue to move steadily, you can refinance at any time.
Important takeaway: Knowing current interest rates is helpful, but be careful not to paralyze yourself waiting for a decline that may never come. The best time to buy a home is when you can afford it.
Where are you trying to live?
Location, location, location. Depending on where you want to live, your $200K can get a 2-bed, 1.5-bath condo on the Upper West Side of New York City, New York, or a 4-bed, 4-bath home in MT, Bozeman. Of course, your location options can be influenced by where you work. Using remote jobs gives you more flexibility if you are considering moving to another state.
However, you don’t need to move to another state to stretch the 200ka a little more. Sometimes, living a few extra minutes from town will have the opportunity to upgrade to a larger house with extra bedrooms and even more land. Location, location, location – there’s a reason real estate agents say so. It is truly an important element of where you chose to live.
Key Points: If you’re willing to live in the more rural areas, you might be able to buy a little more home with your $200K salary.
How much work do you need at home?
If you’re happy with your DIY project and are learning from YouTube, purchasing Fixer-Upper will help you further increase your budget. Please note that there is a big difference between cosmetic updates and major structural issues. Always hire a professional home inspector before closing to reveal hidden issues.
In short, if you have the skills and time to sweat, you can get more homes for $200k.
Conclusion: I know what you can afford
Now that you have a clearer grasp of what you have to decide how much you can afford on a $20 million salary, you are in a stronger position, start the tour and create an offer. For a more accurate estimate, try using Redfin’s mortgage calculator to find the right debt-to-income ratio for your situation. Also, start exploring your home within the budget of the area you plan to root for.
