How Much Do I Need To Buy A 400k House – Now that we’ve had some fun figuring out the minimum income and net worth it takes to buy a $5 million house, I thought it would be good to be more inclusive. This post discusses the income and assets requirements for buying a house priced from $200,000 to $50 million.
Income and net worth are determined by my 30/30/3 home buying rule and my home buying rule. I truly believe that the combination of these two rules is the ultimate guide to responsible home purchasing.
How Much Do I Need To Buy A 400k House
My goal is to consistently provide home buying guides that work as we make more money and get richer.
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Check out the chart below based on two of my home buying guides. As you can see in the chart, the more expensive the house, the more you have to build and the higher your net worth.
You will see the minimum income and minimum assets required to buy a home and the recommended income and minimum assets required to purchase a home.
Now let me share the ideal combination from best to worst before buying a house. Ideal income and net worth requirements help you shop with more confidence.
You earn an ideal income and have an ideal net worth before you buy a house at a certain price. Then you have minimal financial worries and you can enjoy your home to the fullest. Sometimes you feel like you need to live more. But it’s your financial discipline that got you where you are today.
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In this situation you also do not have much financial worries. Your net worth is well diversified and generates a reasonable amount of passive income on top of your active income. You can probably generate more active income if you want to.
You’re right in the middle. However, your goal should be to increase your net worth so that your primary residence falls below 50% of your net worth. In general, no asset class should account for more than 50% of your net worth. The main residence may not exceed 30% of your assets.
You should do well in such circumstances as long as you have confidence in your job prospects in the years to come. In five years your wealth will most likely grow strongly. Just keep saving and investing in stocks, real estate and alternative assets.
Buying a house with this combination is quite a job. However, you are optimistic about your future income and capital growth. As a result, each year you work, you will feel more comfortable taking care of your household.
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The ultimate goal is for your primary residence to be worth 30% of your net worth or less by the time you retire or downsize.
If you do not have a minimum income or if you do not have a minimum equity capital, it is not advisable to buy another home. If you go ahead and buy a house with this sub-optimal combination, you’ll be too financially open to sleep well at night. Any job loss or recession could cause you to lose your home through a short sale or foreclosure.
For first-time homebuyers, the most likely financial combination is minimum income and minimum assets. But for experienced homebuyers, having 1-3 financial combinations above is the best way to go.
If you get very rich (more than $10 million per person), you can stretch the rules even further if you want to buy a nicer house. But my guidelines actually suggest keeping your primary residence less than 50% of your net worth. Ideally, keep it under 30% of your net worth, no matter how wealthy you are.
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Once you become very wealthy, you actually spend a smaller percentage of your net worth on a primary residence. Most extremely wealthy people have the lion’s share of their net worth in businesses or investments.
Rather than assuming a home buyer puts down 20%, there are certainly circumstances where some home buyers put down much less. It is estimated that about 15% of all home buyers pay cash.
In the case of a high down payment, both income and net worth can lower the suggested requirements. However, it will depend on how much cash and semi-liquid investments you have after buying a home and how much your future income will be reduced.
Here’s an example. Let’s say you are a FANG tech with a 75% down payment because you own a lot of appreciating stocks. You want to buy a $3 million home, put down $2.25 million, and have a $750,000 mortgage. What should your minimum income and net worth be?
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For a disciplined buyer, your income should still be at least 1/5 of the home’s value, or $600,000. If you have $2.25 million to spend, your minimum net worth of $900,000 based on my chart is way over. So you are good in terms of net worth, mainly because you should have more wealth behind you.
But if you make such a large down payment, you will of course have much less trouble paying the mortgage. The reality is that if you only have a $750,000 mortgage after you put down $2.25 million, you could probably only earn $150,000 (1/5 of 750,000). But $150,000 will be very tight, leaving little to save and invest outside of your primary. So I wouldn’t recommend it.
As a compromise, consider using the recommended income ratio of 1/3 of the home’s value applied to the mortgage balance. Therefore, a more appropriate income in this scenario would be $250,000.
You would earn $20,833 per month and pay a monthly mortgage payment of $3,368 at 3.5%. This would be equivalent to paying 16% of monthly gross income.
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If you follow this path, make sure you keep your job or at least earn at least the same amount for the next three years.
Income is the most important factor when buying a house with a mortgage. You cannot get a loan without sufficient income. In this tight credit environment, your income must be at least 20% of the cost of the house you want to buy. Most people with W2 income and a credit score above 720 should be eligible.
If you’re a freelancer with a more volatile income, your income should be much higher than 20% of the home’s value. Plus, you need at least two years of minimum income before a lender steps in. So you can refinance or buy a home before giving up your W2 income.
As you get richer, lenders will be more willing to consider your net worth when making a loan. This is called asset-based pricing and is useful if your income falls below 20% of your home’s threshold. For example, some borrowers with illiquid stock holdings may pledge their stock as collateral.
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Between higher income and higher assets, I would opt for higher assets. A higher net worth not only offers more protection, you can also better protect it against higher loads. Higher income is more of a means to an end, namely higher wealth.
We can then choose an ideal net worth of $12,060,000 for singles and $24,120,000 for couples. This is the inheritance tax exemption limit for 2022.
In 2023, the estate tax exemption limit doubles to $12,920,000 for singles and for married couples! With this combination you pay the least tax and you can still do what you want. If the amount of the inheritance tax exemption falls, you adjust accordingly.
If you’re spending something extraordinary, you can always withdraw the principal if the income of $170,050 or $340,100 isn’t enough.
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Having lived in many homes over 10,000 square feet before, I’m not sure I would want to live there with a family of four or five. As an economics major, I find unused space useless. The ideal size and layout of the house has been put to good use.
I enjoy using all or almost all of the rooms every day. That’s what I feel when I load my car with four or five people and just drive.
After about 1,500 square feet of space per person, that seems like a lot. Perhaps this feeling is a function of living in expensive New York City and San Francisco since graduating in 1999. But I’m thrilled to live in a 750-square-foot house.
After all, if you have children, they will find another place to live. It is therefore possible that you also want a smaller home in the long term.
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