How Much House Can I Afford on a $40,000 per Year Salary


Anyone who makes $40,000 per year and is in the market for a house needs to look no further than this article.

We’ll break down the buying power of a $40,000 per year salary by the numbers. Once you’re finished reading this post, you’ll know exactly how much house you can afford on a $40,000 per year salary. 

At $40,000 per year, a person could likely afford a home priced between $100k to $150k with little problem, whereas anything more expensive will put a strain on their monthly budget. However, several other factors must be considered in the price, such as geographic location, the buyer’s other debts, credit score, and available interest rates.

Over the next few minutes, we’ll examine each of these to give you a closer look at how we came to this conclusion. 

A Quick Look at $40,000 per Year Salary

A $40,000 per year income is classified as falling into the American middle class. While this may be a great income for many workers in their 20s or 30s, it falls below the median. In fact, research indicates that the middle class’s income ranges from $42,000 to $126,000.

By the month and after taxes, a $40,000 per year salary is a net monthly salary of approximately $2,820 (which again – varies slightly based on location). 

Geography in Home Buying

In the year 2022, any discussion of the housing market must acknowledge the impact of COVID-19.

A high-level view of market trends over the last few years would reveal a strong surge in home prices due to many factors, including a lack of inventory or higher costs of building materials. To say that the middle class has suffered a pricing-out of owning homes nationwide would be an understatement.

Regardless of the pandemic’s influence on housing, across the board real estate is most expensive in New York, California, Hawaii, Washington, D.C., and Massachusetts. Median markets exist in Florida, Texas, Georgia, the Carolinas, Minnesota, Tennessee, and Maine. At the opposite end of the spectrum, the least expensive real estate markets fall in West Virginia, Mississippi, Arkansas, Oklahoma, and Kentucky. 

Obviously, a $40,000 per year salary will buy much more home in one of the latter-mentioned states, and less home in one of the first-mentioned.

If your education and skills put you in the $40,000 per year bracket and you prefer more livable space, it’s simple arithmetic to maximize your buying power and temper your budget: Live in one of the median-priced states or one of the lower-market states. 

A Snapshot at Debt

The price of a mortgage is directly influenced by a purchaser’s existing debts.  Too many pre-existing debts might not only prohibit a buyer from taking on more debt, it may also have a negative influence on the interest rate a buyer might lock-in. 

Mortgage underwriting companies are looking at an applicant’s credit score and Debt-to-Income ratio (DTI). Credit scores range from 300-850, and the average American credit score falls right around 698. An individual’s DTI is determined by dividing their monthly debt payments by their monthly gross income. 

From an early age, a person should strive to pay their monthly bills on time and to keep their relative DTI as low as possible. Depending on the underwriter or bank, a home-buyer’s DTI should be less than 40%, preferably in the low 20th percentile, to score better interest rates. A credit score of 640 or lower or a DTI of above 40% could result in a denial of a home loan or a much higher interest rate over prime. 

Finally, if you intend to purchase a house and do not pay at least 20% of the purchase price down, a  requirement of private mortgage interest will be tacked on the mortgage note. This will increase the monthly mortgage payment. Fortunately, PMI may be removed once the buyer has reached 20% or more equity on the mortgage note. 

Related Financial Geek Article: 9 Quick Ways to Save Up for a Down-Payment

Interest Rates and Terms

The next piece of the home-buying puzzle is the interest rate. The Federal Open Market Committee (FOMC) sets the prevailing interest rate. Banks and mortgage companies then set their “prime” rate (the rate they give to their most creditworthy customers) based on the FOMC number. 

Then, the bank or mortgage company looks at an applicant’s credit score (usually the Fair Isaac Corporation or “FICO” score) and DTI to determine the applicant’s interest rate in relation to the prime rate. A higher interest rate means the borrower will pay much more in interest charges over the life the of the loan. Obviously a purchaser will always seek to “lock-in” the lowest interest rate. 

Home loans also have terms, or the amount of time the borrow will pay back the principal with interest. Most home buyers choose either a 15-year or 30-year fixed term, but other terms are possible. The longer the term, the cheaper the monthly mortgage payments may be, but the shorter the term, the lower the interest rate may be. 

How It all Shakes Out

For this analysis, let’s take the tools we’ve examined and apply them to a $40,000 per year salary homebuyer with an average credit score of 698 and a DTI of 15%. 

Example A

This particular homebuyer wants to purchase a home in Tennessee, one of the middle-of-the-road states in the realm of real estate costs. This homebuyer has spent years saving enough cash to put down 20% of the borrowed sum, so no PMI will be on the loan.  

Based on their DTI and credit score, and after submitting mortgage applications through two banks and one mortgage company originator, the best interest rate this buyer gets is 5.15% on a 30-year fixed loan of $265,000, minus the $53,000 cash. The loan amount of $212,000 will result in monthly payments of at least $1,158, but these will be slightly higher due to taxes, loan origination fees, and other closing costs built into the loan. 

Remember, at a $40,000 per year salary, the monthly take home pay is $2,820. This particular buyer has an existing DTI of 15%, which is $500 per month, leaving them with $2,520 per month to spend on living expenses. Subtracting a minimum of a $1,158 mortgage from that leaves the buyer with $1,362 per month to spend on utilities, food, transportation, clothes, and other expenses. Considering the average living expenses for a single person are about $3,000 per month, this will make things tight each month. 

Example B

Alternatively, this homebuyer prefers to maximize their cash leftover after all the bills are paid. They settle on a modest single-family dwelling at $125,000 in Oklahoma. They, too, have saved 20% of the purchase price, and have a 698 credit score and 15% DTI. 

Having received the identical interest rate on a 30-year fixed loan of 5.15%, and subtracting the $25,000 they saved, the loan’s monthly payments are approximately $546. Considering they also have $2,520 per month after taxes and other debt payments are subtracted, they will have an approximate remaining $2,020 for living expenses. 

Choose Your House Wisely

At $40,000 per year salary, a home buyer needs to be smart about location, savings, and creditworthiness. Unless the buyer has a substantial savings, a spouse’s income, or investor to bolster their funds, the reality is that any home above $150,000 will strain the monthly budget.

Related Financial Geek Article: 11 Quick Tips For Spending Your Money More Wisely

An American at this income level needs to search out communities in cities and states with lower real estate prices to maximize the amount of home they can afford on $40,000 per year. 

Geek, out.

Noel Moffatt

Noel Moffatt is the founder and main contributor for his blog - The Financial Geek. Based in Canada, Noel's passion for personal finance has helped him amass over 300k readers to his Financial Geek blog.

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