Income needed for a $500K mortgage: How can you afford it?

In some places, $500,000 buys the nicest home in town. In other places, $500,000 buys a small fixer-upper. 

But in any place, buyers who will finance the $500k house with a mortgage will need enough income to qualify for the loan.

How much do you have to earn to get a $500,000 mortgage? 

What is the needed salary to afford a 500k house?

The average borrower who earns about $140,000 to $150,000 a year should be able to afford a $500k house.

But that’s not the final answer for all borrowers. Along with income, mortgage lenders will look closely at the buyer’s debts and credit history to find out how much house the buyer can afford.

Then, other factors, such as down payment size and current interest rates, will change the loan’s income requirement. Property tax and home insurance rates will change the income needed for the loan, too.

So, “What income will you need to buy a $500k house?” The answer depends.

What factors affect your required income?

Yes, monthly income affects mortgage eligibility, but other factors decide how much income is enough for a $500,000 home. Those variables include:

Market interest rates

Mortgage rates change with market conditions. Rates were ridiculously high — pushing 20 percent! — in the early 1980s. On the other end of the spectrum, during COVID in the early 2020s, some buyers were locking in rates below 3 percent. 

Mortgage rates have a huge impact on monthly mortgage payments:

• Someone borrowing at 18 percent interest would pay more than $7,500 a month on a $500,000 loan — before taxes and insurance. A typical borrower may need to earn about $275,000 a year to afford such a home.

• The same $500,000 loan at 3 percent would require a mortgage payment of about $2,100 a month before taxes and insurance. A typical borrower might need to earn about $80,000 a year to buy the same house.

Those interest rate extremes represent historical anomalies. Most of the time rates are closer to what they are now, between 5.5 and 7.5 percent. But even changes within this smaller range can change income required to buy by tens of thousands of dollars:

— At 5.5 percent, the principal and interest due on a $500,000 loan is $2,839 (30 percent of an annual salary of $113,560)

— At 7.5 percent, the principal and interest due on a $500,000 loan is $3,496 (30 percent of an annual salary of $139,840)

Of course, neither borrowers nor lenders can control global market forces. Fortunately, borrowers can influence the other variables that affect income eligibility.

The borrower’s other debts

Lenders compare the borrower’s gross monthly income to the borrower’s other debts to find out how much of their income they have left to spend on housing. Lenders measure this through debt-to-income ratio, or DTI.

A borrower with a lower DTI can spend more money on their monthly mortgage payments. That’s why lower DTIs help secure larger loans.

Let’s say two borrowers both earn $125,000 a year and the lender will approve a $500,000 loan with a DTI of 43 percent. That means these borrowers can spend up to $4,479 a month on debt, including the new mortgage payment.

— Borrower 1 owes $800 in car payments, $500 in student loan payments, and $400 in minimum credit card payments. In total, this borrower already spends $1,700 in monthly income on debt, leaving only $2,279 to spend on a mortgage.

— Borrower 2 has a $300 car payment, a $200 student loan payment, and $80 in credit card payments, reserving $580 of monthly income for total debt. This leaves $3,899 for housing. 

Borrower 2 is much more likely to get approved for a $500,000 mortgage, even though both borrowers earn the same monthly income. 

Down payment size

Putting more money down on the home helps buyers stretch their income to qualify for a $500,000 home. Here’s how:

— Down payments reduce loan sizes: A buyer who can put $50,000 down on a $500,000 home needs to borrow only $450,000. Monthly on a $450,000 mortgage will be lower than payments on a $500,000 loan.

— Down payments can lower mortgage rates: Minimum down payments put lenders at higher risk which raises mortgage rates. Putting down more than the minimum amount can lower rates which lower monthly payments, stretching income farther.

— Down payments reduce mortgage insurance: Conventional borrowers who put 20 percent or more down won’t pay private mortgage insurance (PMI), shaving hundreds off a monthly payment and reducing the amount of income needed to qualify.

Unless they’re also selling a home, most buyers cannot afford to put 20 percent down on a $500,000 home. But paying down as much as possible can lighten the burden on income for some borrowers. 

To see how down payments affect mortgage payments, experiment with a mortgage calculator. 

Credit history

Higher credit scores, when they’re based on a stable credit history, can lower the borrower’s interest rate which lowers the monthly payment and stretches income farther. Conventional borrowers with FICO scores in the high 700s often see the biggest impact on their rates. 

Discount points

Discount points lower a loan’s rate in exchange for upfront cash paid to the lender. On a $500,000 loan, a discount point may cost $5,000 and lower the loan’s fixed rate by 0.25 percent. This rate reduction lowers the monthly payment, reducing the amount of income needed to qualify for the loan.

Additional costs of homeownership

Most of a monthly mortgage payment covers the principal and interest due on the loan for that month. But the payment also includes money for the home’s annual property taxes and insurance premiums. Many homes also require Homeowners Association dues. 

Homes in areas with lower tax and insurance rates, and homes that do not require HOA fees, will lower monthly homeownership obligations, helping the buyer qualify for the loan.

Type of income

Not all income counts for mortgage qualifying. Lenders only count income when they expect the borrower to keep earning at the same level in the future. Income from a new part-time job, for example, may not be eligible.

Typically, borrowers with two years or more of W2 forms from an employer can count all of gross monthly income. 

Loan type

Different loan types have different qualifying rules, so the amount of income a borrower needs to buy a $500,000 can vary by loan type. For example, an FHA loan may allow a DTI of 50 percent for some borrowers. With so much room in the monthly budget, borrowers may qualify with a smaller down payment or a less-than-stellar credit score.

There is a tradeoff. The FHA’s mortgage insurance premium (MIP) will add an extra 1.75 percent of the loan size upfront and another 0.55 percent annually for buyers who put less than 10 percent down. But for many borrowers, these fees can be worth the cost.

How can a borrower know which loan type works best? Loan officers with Better help borrowers find the loan type that best matches their unique needs. Along with FHA and conventional loans, Better offers USDA and VA mortgages. 

...in as little as 3 minutes – no credit impact

Income scenarios to pay a 500k mortgage

Let’s see how these variables play out in some real-life scenarios. In the examples below, all three borrowers are under contract on the same $500k home. All three are getting 30-year fixed rate mortgages to help finance the purchase price:

	Borrower 1	Borrower 2	Borrower 3
Loan type	FHA	Conventional	Conventional
Down payment	3.5% ($17,500)	20% ($100,000)	8% ($40,000)
Loan size	$490,943.75 (includes 1.75% upfront MI)	$400,000	$460,000
Debt-to-income max	45%	36%	36%
FICO score	625	710	770
30-yr Fixed Rate	7.25%	7.0%	7.125%
Principal + Interest	$3,435	$2,661	$3,099
Monthly MI	$225 MIP (0.55% annually, life of loan)	$0 (PMI not required with 20% down)	$287.50 PMI (0.75% until 80% LTV)
Taxes + Insurance	$500/month	$500/month	$500/month
Total monthly payment	$4,160	$3,161	$3,887
Other debts	$1,100/month	$1,100/month	$1,100/month
Income needed	$140,268	$142,032	$166,236

For example purposes only. Taxes, insurance, private mortgage insurance, and interest rates vary by borrower.

In the examples above, three different borrowers needed three different levels of income to qualify for the same home.

The FHA borrower needed the lowest income despite paying a higher interest rate and a higher monthly payment. How is this possible? DTI. Since federal insurance is protecting the lender from loss, the lender could allow a DTI as high as 45 percent. Some lenders can push DTI on an FHA loan to 50 percent or even a little higher. 

What about the difference between the two conventional borrowers? Borrower 2’s 20 percent down payment changed the game by lowering the loan size and lowering the loan’s fixed interest rate and eliminating the need for private mortgage insurance (PMI) payments.

...in as little as 3 minutes – no credit impact

Strategies to improve your home mortgage affordability

So, what can you do to stretch your income for a $500,000 home?

Pay down existing debts

Owing less on debt means more monthly income can go toward housing. This can reduce the amount of income needed for a $500,000 home. So choosing a less expensive car, or relying less on credit cards, can increase mortgage borrowing power without increasing income. 

There is a limit to this strategy. Along with back-end DTI, which includes all of the borrower’s debts, lenders must also calculate front-end DTI which compares only the house payment to the borrower’s income. Borrowers must stay within both DTI thresholds.

The front-end DTI for conventional loans is usually 28 percent. For most FHA loans, front-end DTI can’t exceed 33 percent. Even if a borrower paid off all non-housing debt, front-end DTI would still limit how much income can be spent on housing.

Work with a real estate agent you trust

A house that costs less will require less income to buy. Real estate agents who know their local markets can help buyers find homes that cost less to buy and maintain. An agent could direct buyers to $500k homes in areas with lower property tax values.  

Agents can also negotiate with sellers on the buyer’s behalf. For example, if the agent arranges for the seller to pay more closing costs, the buyer can put more money toward the home’s down payment, lowering DTI.

How can you find a good agent? Better’s Agent Match program pairs buyers and agents while also yielding a $2,000 credit for the borrower. 

Focus on savings

A healthy savings account makes home buying easier. First, the ability to make a larger down payment makes loan qualifying less stressful. Also, buyers who don’t need help with closing costs may be able to negotiate for a lower purchase price. 

Then, having enough money saved to keep an emergency fund after buying the home also helps with loan qualifying by reducing lender risk.

For most home buyers, saving money means spending less and saving their windfalls, like tax returns, instead of spending them. Following a realistic budget will help. Not sure where to start? These resources can help.

Focus on earnings

Home buyers shouldn’t try to game the system by working two full-time jobs in the two years before applying for a mortgage. That could be exhausting, and the lender may accept only one of the two sources of income anyway.

Buyers should earn more money in more sustainable ways. For example, they can work all their available hours. When turned into a habit, coming into work late on Mondays or going home early on Fridays can have a real impact on income for a mortgage.

Home buyers can also ask for a raise or pick up a part-time job with a schedule they can sustain indefinitely. Side hustles can help, but contract workers will need to share tax returns to prove this income. The key question for qualifying mortgage income: Will the borrower keep earning the money for two to three more years?

Use the right loan type

Buyers who use the type of mortgage that best meets their needs can optimize their income for a $500k mortgage. Borrowers with large down payments, excellent credit scores, and low debt loads can often save with conventional borrowing. Others may fare better with an FHA loan.

Military-affiliated home buyers can use VA loans to enhance their borrowing potential. Many VA-authorized lenders can allow higher DTIs, and VA loans require no down payment for most eligible borrowers. 

A Better loan officer can help find the best type of mortgage.  

Pre-approval can solve the $500k home mystery

Since the median price for homes in the U.S. exceeds $400,000, buying a $500,000 home is no longer all that unusual. 

But buying a $500k home is still quite an accomplishment. Better’s personalized, transparent loan process removes the mystery for borrowers, helping them achieve this goal sooner. 

Getting a Better pre-approval can show how your income stacks up before yous start shopping for homes.

Start the pre-approval process here.

...in as little as 3 minutes – no credit impact