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Vault’s Viewpoint

• Many lenders use the 28/36 rule when determining a buyer’s eligibility to buy a house.
• Your credit score, payment history and downpayment also affect your ability to afford a house.
• Based on current mortgage rates, you might be able to afford a $400K home with around an $80,000 income if you don’t have other debt.

Income Needed to Afford a $400K Home

If you want to buy a $400,000 home, your income is important, but so are your total debt payments. Many lenders use what’s called the 28/36 rule. This means your mortgage payment shouldn’t be more than 28% of your gross monthly income, and your total debt payments shouldn’t be more than 36%.

With a 20% downpayment, a $400,000 house with a 30-year fixed mortgage at 7.5% interest gives you a monthly mortgage payment of around $2,237. These numbers means someone with an $80,000 income could potentially afford a $400,000 home with the 28/36 rule because 28% of $80,000 is $2,240. However, you may have more numbers to consider.

First, this $2,237 monthly mortgage payment does not include property taxes or home insurance, which vary depending on where you live and other factors. Additionally, your income is only half of the 28/36 rule. Lenders also consider your total debt obligations, which impact home affordability.

Approximately 45% of Americans carry credit card debt, according to the U.S. Government Accountability Office, and 43.2 million Americans have student loan debt, according to the latest data from Federal Student Aid. So, it’s a good idea to consider your total monthly financial picture when buying a house. After all, buying a home should be an exciting milestone, not one that stretches your finances too thin.

Using the 28/36 rule, here are examples of income and debt payment combinations that could potentially afford a $400,000 house.

Example 1: Person With an $85,000 Income and Existing Debt Payments

• Gross annual income: $85,000
• Gross monthly income: $7,083
• Monthly student loan payment: $250
• Monthly car payment: $400

Applying the 28/36 rule to an $85,000-a-year income means this person can afford a mortgage payment of around $2,380.

If you factor in the student loan and car payments, you get a total monthly debt obligation of $3,030. Since $3,030 is less than 36% of $85,000, this example meets the 28/36 rule requirements.

This means the person in Example 1 can likely afford the payments on a $400,000 home, so long as they meet other requirements, like having good credit and making a 20% downpayment.

Example 2: $150,000 Income With Large Student Loan Debt Payments

• Gross annual income: $150,000
• Gross monthly income: $12,500
• Monthly student loan payment: $1,200
• Monthly car payment: $850

This example represents a couple who together make $150,000 annually. Their gross monthly income is approximately $12,500. Using the 28/36 rule, this couple can theoretically afford up to a $4,200 mortgage payment—more than enough for a $400K home.

However, this couple has student loan payments of $1,200 per month and car loans totaling $850 per month. A $4,200 mortgage payment plus their other loan payments equals $6,250 monthly. This total debt obligation would be around 42% of their $150,000 income, meaning they can’t take out a mortgage at 28% of their gross monthly income.

Accounting for their debt, they can only spend $3,350 monthly on a mortgage. This means the couple could afford $400,000 with room to spare. In fact, if they purchase a $400,000 home instead of the maximum amount a lender would allow, they could use the difference to pay down their existing student loan and car loan debt.

Where Can You Find a $400K Home?

Data from the National Association of Realtors shows the most affordable houses in the U.S. are in the Midwest and the South. The median sales price of existing single-family homes in the South is approximately $360,000, and the median sales price in the Midwest is even less at around $283,000.

It’s possible to find a home in the Northeast around the $400,000 range since the median is around $441,000, but steer clear of the western United States, where the median home price is just over $600,000.

How to Qualify for a $400K Home

If you’re a first-time homebuyer, the steps to qualifying for a mortgage might seem overwhelming. However, the process becomes more straightforward once you understand what lenders consider when evaluating you for a mortgage.

Lenders will look at your credit report to see whether or not you have accounts in collection or a history of bankruptcy. They’ll also calculate your debt-to-income ratio, access your credit score and review your bank statements.

It might feel invasive for lenders to look at every aspect of your financial history, but to get a mortgage, lenders need to determine the likelihood you’re going to make your mortgage payments on time. Here are the steps to take to qualify for a $400,000 home.

Step 1: Pull Your Own Credit Report

The Consumer Financial Protection Bureau received nearly 450,000 complaints about credit report mistakes in 2023. So, before you prequalify for a mortgage or go house shopping, pull a free copy of your credit report, which you can do at AnnualCreditReport.com. Look at your credit report carefully to make sure you don’t have any errors on it.

If you do, take the time to contact the credit bureaus and correct them before prequalifying for a mortgage.

Step 2: Prequalify for a Mortgage

Pre-qualifying is when you submit your initial information, like your income and Social Security number, to a few mortgage lenders. They use this information to give you a tentative decision on whether or not they’d approve you for a mortgage.

Their decision is not binding and is subject to your filling out a full application after finding a house you love. It’s a good idea to prequalify for a mortgage because if you want to put in an offer on a house, having a prequalification note shows you’re a serious buyer.

Step 3: Find a House You Love and Formally Apply

House shopping is the best part of qualifying for a mortgage. Once you find a house you love and the seller accepts your offer, fill out a formal mortgage application with the lender you choose. The application and loan processing period can take around 30-60 days, depending on your lender.

During this time, the mortgage company will complete the underwriting process and ask you to verify the information in your application. It’s important to answer the mortgage company’s questions and phone calls quickly so you don’t delay the approval process.

Your mortgage lender will verify your income, review your credit history and examine your most recent bank statements to determine whether you meet the requirements to qualify for a $400,000 mortgage. If you do, you’ll move forward and sign closing documents on your closing date to officially take ownership of your home.