Average Income Earners Don't Make Enough to Qualify For The Average Home – Here's How Much You Need To Make For A $500,000 Mortgage

For first-time homebuyers, finding the perfect time to enter the real estate market can feel like a never-ending game. In the face of record-high inflation, steep interest rates and a dwindling supply of new homes, the path from renter to homeowner has become increasingly challenging. 

But amidst the economic uncertainties, there are strategic moves potential buyers can make to ensure they are well-prepared when the right opportunity arises.

To begin with, it is crucial to have a clear understanding of your financial situation and determine the buying power your annual income can provide. The average sales price of houses sold in the U.S. so far this year is $487,300, according to U.S. Census Bureau data.

The cost of everyday expenses has been on the rise, potentially making it more challenging for homebuyers to cover the upfront costs associated with purchasing a home. While the consumer price index (CPI) indicated a slowdown in overall prices, as reported by the U.S. Department of Labor, specific indexes such as shelter, household furnishings and operations, motor vehicle insurance, recreation and apparel experienced a slight increase.

Understanding the 28/36 rule can serve as a helpful benchmark for prospective buyers. This rule suggests that no more than 28% of a buyer's pretax monthly income should be allocated to housing costs, and the total housing costs plus monthly debt payments should not exceed 36% of their pretax income. Housing costs encompass various expenses, including mortgage payments, property taxes, home insurance, mortgage insurance and homeowners association fees. Debt payments, on the other hand, account for monthly bills related to student loans, car loans, credit cards and other debts.

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It's worth noting that buyers can still qualify for a mortgage even if their housing and debt costs surpass the 28/36 rule. For instance, FHA loans backed by the Federal Housing Administration allow housing costs of up to 31% of pretax income and debts plus housing costs of up to 43% of pretax income. In certain cases, there may be some flexibility available.

To provide a practical example, if you were to put 10% down on a $333,333 home, your mortgage would amount to approximately $300,000. According to calculations, you would ideally need an annual pretax income of at least $110,820 to qualify for this scenario, although a slightly lower annual income of $100,104 might still be eligible. These calculations assume a 7% interest rate, a 30-year term, no recurring debt payments, no homeowners association fee and estimated monthly costs for private mortgage insurance, property tax and home insurance.

Similarly, if you were to put 10% down on a $555,555 home, your mortgage would total around $500,000. In this case, the recommendation is a minimum annual pretax income of $184,656, but qualifying may still be possible with an annual income of $166,776. Again, these calculations consider a 7% mortgage rate, a 30-year term, no recurring debt payments, no homeowners association fee and estimated monthly costs for private mortgage insurance, property tax and home insurance.

Now, getting closer to the average home price, if you were to put 10% down on a $444,444 home, resulting in a mortgage of approximately $400,000. The recommended annual pretax income is at least $147,696, but a lower annual income of $133,404 may still qualify. 

It's important to note that these figures are general guidelines, and the exact amount you can comfortably pay each month will depend on your financial obligations and goals.

Considering the average personal income in the United States is $63,214 as of 2023, with a median income of $44,225, it is evident that affordability varies significantly across different regions. Real wages averaged $67,521 in 2022, with average household incomes reaching $87,864. With an annual income of $70,000, it is reasonable to expect that you could afford a home within the range of $290,000 to $360,000.

Finding affordable homeownership may seem out of reach for average-income earners, but there are still options to consider. While the average income may not align with the income needed to purchase a home at the median sales price, don't lose hope. One alternative avenue to explore is real estate investing.

Real estate investing provides an opportunity for people to build wealth and generate passive income. Although homeownership may be challenging, investing in real estate allows you to participate in the market and potentially benefit from its returns. 

While you continue to work toward homeownership, renting for an extended period doesn't have to be a setback. Use this time to your advantage by living as if you already have a mortgage. Save the difference between your rent and the estimated mortgage payment to boost your down payment, pay off debts or start an emergency fund. Remember, there is more to life than mortgage payments, and it's essential not to become fixated on achieving homeownership at the cost of your financial well-being.

Flexibility and open-mindedness are key when navigating the real estate market. 

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