How Much Do You Need to Make to Afford a $400,000 Home?

Originally reported by Fortune

Are You considering Buying A Home?

If you're considering buying a home in today’s market, you might be wondering how much income you need to afford a $400,000 house. According to U.S. Census Bureau data, the median home price surpassed $400,000 in late 2021 and has remained above that mark since. While affordability varies based on location, mortgage rates, and down payment amounts, $400,000 serves as a useful benchmark for gauging the U.S. housing market.

The Role of Your Down Payment

A common belief is that you need a 20% down payment to buy a home, but in reality, many conventional loans require as little as 5%, and first-time homebuyers may qualify for just 3% down. Government-backed loans, such as FHA loans, allow a 3.5% down payment, while VA and USDA loans offer options with no down payment required.

However, the less you put down, the larger your mortgage—and the higher your monthly payments. For example, with a 3% down payment on a $400,000 home, you’d put down $12,000 and finance $388,000. At 20% down, your mortgage would be just $320,000. With a 7% interest rate on a 30-year loan, the estimated monthly payment would be around $2,581 with 3% down versus $2,129 with 20% down. If interest rates drop to 6%, those payments decrease to approximately $2,326 and $1,919, respectively.

Why Your Credit Score Matters

The mortgage rate you receive significantly affects affordability. While you generally need at least a 620 credit score for a conventional loan, better scores unlock lower interest rates. Borrowers with scores of 760 or higher typically secure significantly better rates than those with scores closer to 620, potentially saving tens of thousands of dollars over the life of a loan.

Understanding Debt-to-Income Ratio

Your debt-to-income (DTI) ratio also plays a major role in mortgage approval. Lenders typically prefer a DTI of 36% or lower, though some allow up to 43%. A borrower earning $60,000 per year ($5,000 per month) with $1,800 in monthly debt payments would have a 36% DTI, which is within the preferred range.

If you're planning to finance most of your home purchase, reducing existing debt before applying for a mortgage could improve your loan options and affordability.

How Much Income Do You Need?

A common rule of thumb is that homebuyers should aim for a home price that is three to four times their annual income. By this guideline, a household earning at least $100,000 per year may afford a $400,000 home.

Another approach is the 28% rule, which suggests allocating no more than 28% of gross monthly income to housing costs. With a $100,000 salary (or $8,333 per month), this translates to a maximum recommended housing payment of about $2,333. As seen in earlier mortgage calculations, a $400,000 home could be affordable with the right down payment and loan terms.

Where Can You Find $400,000 Homes?

While home prices vary widely by location, about 96% of U.S. counties have a median home price below $550,000, according to the National Association of REALTORS. Coastal markets tend to have higher prices, while more affordable homes are found in the Midwest and South. Even within metro areas, significant price differences exist. For example, in North Carolina, Mecklenburg County (home to Charlotte) has a median home price of $460,450, while nearby Gaston County’s median price is just $296,340.

Final Thoughts

Whether you can afford a $400,000 home depends on your down payment, debt load, and mortgage terms. If your budget falls short, you may need to reconsider factors such as location, home size, or financing options. As Rob McGibney, president of KB Home, advises, "A small adjustment—selecting a different floor plan, opting for less square footage, or prioritizing certain design choices—can help bring costs down without sacrificing quality and livability. Exploring different loan structures and first-time buyer programs can also provide greater flexibility and help make homeownership attainable."

Ultimately, smart financial planning and careful consideration of mortgage terms will help you determine if a $400,000 home fits within your budget.