What Home Can You Afford on a $90K Salary?

Buying a home is a significant milestone, and understanding what you can afford is crucial to making an informed decision. If you earn $90,000 annually and are considering a down payment of 5%, you’ll need to factor in your Debt-to-Income (DTI) ratio to determine the price range of a home you can comfortably afford. In this article, we’ll break down how to calculate your home affordability and ideal home price, taking into account a 35% DTI ratio and a 5% down payment.

What is a Debt-to-Income (DTI) Ratio?

The Debt-to-Income (DTI) ratio is a financial metric used by lenders to determine your ability to manage monthly payments and repay debts. It’s calculated by dividing your total monthly debt payments by your gross monthly income. A lower DTI ratio generally indicates a healthier financial situation and a greater ability to handle new debt.

For homebuyers, a common DTI ratio limit is 35%, meaning your total monthly debt payments, including your mortgage, should not exceed 35% of your gross monthly income. This ratio helps ensure you won’t overextend yourself financially.

Calculating Your Gross Monthly Income

First, let’s calculate your gross monthly income based on an annual salary of $90,000.

Gross Monthly Income = Annual Salary / 12

Gross Monthly Income = 90,000 / 12 = 7,500

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Determining Your Maximum Monthly Debt Payment

Using the 35% DTI ratio, you can determine the maximum amount you should spend on monthly debt payments. This includes your mortgage payment, property taxes, homeowners insurance, and any other debts you may have.

Maximum Monthly Debt Payment = Gross Monthly Income × DTI Ratio

Maximum Monthly Debt Payment = 7,500 × 0.35 = 2,625

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So, you can afford to spend up to $2,625 per month on all debt obligations, including your mortgage payment.

Estimating the Mortgage Payment

To estimate the price of the home you can afford, you’ll need to determine the maximum mortgage payment that fits within your budget. This includes principal and interest, property taxes, and homeowners insurance. For simplicity, we'll focus on the principal and interest portion first.

Mortgage Payment Formula

The mortgage payment can be calculated using the following formula:

M = P × r × (1 + r)^n / ((1 + r)^n - 1)

Where:

• M = Monthly mortgage payment
• P = Loan principal (amount borrowed)
• r = Monthly interest rate (annual interest rate divided by 12)
• n = Total number of payments (loan term in months)

Assumptions for Calculation

1. Interest Rate: We’ll use a 6% annual interest rate for this example.
2. Loan Term: A standard loan term is 30 years, or 360 months.

Example Calculation

Let’s determine how much you can borrow based on a $2,625 monthly budget for principal and interest payments.

1. Convert Annual Interest Rate to Monthly Rate:

r = Annual Interest Rate / 12

r = 6% / 12 = 0.005

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2. Loan Term in Months:

n = 30 × 12 = 360

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3. Rearrange the Formula to Solve for Principal P:

Using the mortgage payment formula, we solve for P (principal).

P = M × ((1 + r)^n - 1) / (r × (1 + r)^n)

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Substitute M = 2,625, r = 0.005, and n = 360:

P ≈ 438,775

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Adding the Down Payment

With a 5% down payment, you’ll need to account for the total home price and subtract your down payment to determine the loan amount.

Down Payment = Home Price × 0.05

Loan Amount = Home Price - Down Payment

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Substituting the loan amount from above:

438,775 = Home Price - (Home Price × 0.05)

438,775 = Home Price × 0.95

Home Price = 438,775 / 0.95 ≈ 461,870

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Factoring in Property Taxes and Insurance

While the above calculation provides a good estimate, it’s important to consider property taxes and homeowners insurance, which can significantly affect your monthly budget. Typically, property taxes and insurance together add 0.5% to 1% of the home’s value annually. For our example, let’s use 0.75%.

Estimate Property Taxes and Insurance

Annual Property Taxes and Insurance = Home Price × 0.0075

Annual Property Taxes and Insurance = 461,870 × 0.0075 ≈ 3,464

Monthly Property Taxes and Insurance = 3,464 / 12 ≈ 289

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Adjusted Monthly Budget

To ensure your total monthly debt payments remain within the $2,625 budget:

Adjusted Mortgage Payment = 2,625 - 289 ≈ 2,336

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Recalculate the loan amount based on the adjusted monthly mortgage payment:

P = 2,336 × ((1 + 0.005)^360 - 1) / (0.005 × (1 + 0.005)^360)

P ≈ 386,165

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New Home Price Calculation

386,165 = Home Price × 0.95

Home Price = 386,165 / 0.95 ≈ 405,400

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Conclusion

With a $90,000 annual salary, a 35% DTI ratio, and a 5% down payment, you can afford a home priced around $405,400. This estimate considers a 6% interest rate, a 30-year loan term, and typical property taxes and insurance. Your monthly mortgage payment would be ~ $2,366 per month.

Before making any decisions, consult with a financial advisor or mortgage lender to get a more personalized analysis based on current interest rates and your financial situation. It’s also wise to budget for unexpected expenses and ensure that your new home fits comfortably within your overall financial plan.

Understanding your affordability is the first step toward making a sound investment in your future. Happy house hunting!

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