Start With Your Gross Monthly Income

Mortgage affordability is generally calculated using your gross monthly income. This is the amount you earn before income taxes, insurance, retirement contributions, and other payroll deductions are taken out.

To estimate your gross monthly income, divide your annual gross income by 12.

For example, someone earning $72,000 per year has gross monthly income of approximately $6,000.

A General Monthly Housing Guideline

A common starting point is to estimate a total monthly housing payment near 30% of your gross monthly income. Your complete housing payment may include:

• Mortgage principal.
• Mortgage interest.
• Michigan property taxes.
• Homeowners insurance.
• Private mortgage insurance or FHA mortgage insurance, when applicable.
• Homeowners association dues, when applicable.

This is only a planning guideline. Some buyers may qualify above or below this amount depending on the loan program, debts, credit, assets, down payment, and underwriting results.

Estimated Housing Budget by Annual Income

These figures are general educational estimates. The housing budget shown includes more than principal and interest and should not be interpreted as a loan approval or guaranteed payment.

Your Monthly Debts Can Change the Answer

Lenders also consider your debt-to-income ratio, commonly called DTI. Your DTI compares your required monthly debt payments with your gross monthly income.

Monthly obligations that may be considered include:

• Car loans and leases.
• Minimum credit-card payments.
• Student loans.
• Personal loans.
• Other mortgages.
• Alimony or child-support obligations.
• The proposed mortgage payment.

As a general planning guideline, total monthly debts—including the new housing payment—are often targeted below approximately 45% of gross monthly income. However, permitted ratios vary by borrower, lender, loan program, compensating factors, and underwriting system.

Income Is Not the Same as Buying Power

Two home buyers who earn the same income may qualify for very different mortgage amounts.

For example, buying power may be affected by:

• The interest rate available when you apply.
• Your credit score and credit history.
• Your down payment.
• Your existing monthly debts.
• The property’s tax amount.
• The cost of homeowners insurance.
• Mortgage insurance requirements.
• Homeowners association dues.
• The type and term of the mortgage.
• Whether your income can be documented and used for qualification.

Michigan Property Taxes Can Affect Affordability

Property taxes can vary significantly between Michigan cities, townships, villages, counties, and school districts. Two homes with the same purchase price may have different tax bills depending on where they are located.

Michigan Principal Residence Exemption

A qualifying owner-occupied primary residence may be eligible for Michigan's Principal Residence Exemption, commonly called the PRE.

The PRE exempts an eligible principal residence from the local school operating tax, up to 18 mills. It does not eliminate all property taxes.

Buyers should confirm estimated future taxes with the local assessor and submit any required Principal Residence Exemption paperwork after purchasing an eligible home.

How Interest Rates Affect Your Home-Price Range

Your interest rate affects how much of each monthly payment goes toward principal and interest. When rates increase, the same monthly budget generally supports a smaller loan amount. When rates decrease, the same monthly budget may support a larger loan amount.

Mortgage rates change frequently and may vary based on the market, loan program, credit profile, property, occupancy, down payment, and other factors.

For this reason, an online estimate should use a realistic current interest-rate assumption rather than relying on an outdated rate or a rate advertised without considering borrower qualifications.

How Your Down Payment Affects Affordability

A larger down payment can reduce your loan amount and monthly principal-and-interest payment. It may also affect your interest rate and mortgage-insurance requirements.

However, using all available savings for a down payment may leave too little money for closing costs, moving expenses, repairs, furnishings, emergencies, or unexpected homeownership expenses.

Depending on eligibility and the selected program, buyers may have options that include:

• Low-down-payment conventional financing.
• FHA financing.
• VA financing for eligible borrowers.
• USDA financing for eligible borrowers and properties.
• Available down-payment-assistance programs.

Remember to Include Closing Costs

Your down payment is only one part of the cash you may need to purchase a home. Closing expenses may include:

• Lender fees.
• Appraisal costs.
• Credit-report fees.
• Title and settlement charges.
• Recording charges.
• Prepaid homeowners insurance.
• Prepaid interest.
• Initial property-tax and insurance escrow deposits.
• Optional inspections.

The amount needed can vary by property, purchase agreement, loan program, lender, and closing date. A personalized loan estimate provides a more useful picture than looking at the down payment alone.

What Income Can Be Used to Qualify?

Depending on documentation and loan-program requirements, qualifying income may include:

• Salary or hourly wages.
• Overtime, commissions, or bonuses.
• Self-employment income.
• Retirement or pension income.
• Social Security income.
• Disability income.
• Documented rental income.
• Other eligible recurring income.

Not every dollar deposited into a bank account can automatically be treated as qualifying income. The lender generally must determine whether the income is stable, documented, and reasonably expected to continue.

What Documents May Be Needed?

To calculate affordability more accurately, you may be asked for:

• Recent pay stubs.
• W-2 forms.
• Federal tax returns when required.
• Bank and investment statements.
• Current mortgage or rental information.
• Documentation of monthly debts.
• Employment history.
• Photo identification.
• Documentation supporting your down payment.

Approval Amount Versus Comfortable Payment

The maximum mortgage amount for which you qualify is not necessarily the amount you should spend.

Before selecting a monthly payment, consider your complete budget, including:

• Utilities.
• Home maintenance and repairs.
• Transportation.
• Food and childcare.
• Health and insurance expenses.
• Retirement savings.
• Emergency savings.
• Travel and entertainment.
• Future financial goals.

A comfortable mortgage payment should allow you to own and enjoy your home without placing unnecessary pressure on the rest of your finances.

Frequently Asked Questions

How many times my salary can I borrow?

Salary multiples can provide a rough starting point, but they do not account for interest rates, debts, taxes, insurance, mortgage insurance, or loan-program requirements. A payment-based estimate is generally more useful.

Can I afford a home on a $50,000 salary?

A $50,000 annual income equals approximately $4,167 in gross monthly income. A 30% housing guideline would be approximately $1,250 per month for the total housing payment. Your actual buying power depends on your debts, credit, down payment, interest rate, taxes, insurance, and loan program.

Can I afford a home on a $75,000 salary?

A $75,000 annual income equals approximately $6,250 in gross monthly income. A 30% housing guideline would be approximately $1,875 per month. Existing debts and property-related costs may increase or decrease the home price supported by that budget.

Can I afford a home on a $100,000 salary?

A $100,000 annual income equals approximately $8,333 in gross monthly income. A 30% housing guideline would be approximately $2,500 per month. This amount must cover applicable principal, interest, taxes, insurance, mortgage insurance, and association dues.

Does my spouse's or co-borrower's income count?

Eligible, documented income from a co-borrower may be considered when both borrowers apply for the mortgage. The lender will also evaluate the co-borrower's debts, credit, and other qualification factors.

Does overtime or bonus income count?

Overtime, commissions, and bonus income may be considered when they meet applicable documentation, history, stability, and continuance requirements.

Does a large down payment increase what I can afford?

A larger down payment reduces the amount financed and may lower the monthly payment. It may also reduce or eliminate certain mortgage-insurance costs, depending on the program.