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This is how much money you need to earn annually to comfortably buy a $400,000 home

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Over the past two years, home prices have skyrocketed amid the combined impacts of a global pandemic and housing inventory shortages. Between 2020 and 2022, home prices soared 30%, according to Freddie Mac. And by 2022, the median sale price for a home in the U.S. stood at $397,549, according to Redfin.

Amid all of these pressures, mortgage interest rates have also been rising sharply, making monthly payments even more daunting. The national average mortgage rate is now 6.9%, which is 3.8 points higher than last year at this time, Redfin reports.

There are a lot of factors to consider when deciding how much home you can afford to buy, and salary is a big piece of the equation. Fortune Recommends editors crunched the numbers to look at what salary one would need to earn in order to afford a $400,000 home in the U.S.

The steep climb of home prices

The real estate industry’s wild ride over the past few years has been well documented.

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In October 2019, the median sale price for a home stood at $293,109, according to Redfin data. But the emergence of the COVID-19 pandemic in January 2020 brought about a perfect storm of market forces that drove home prices upward. This included record low mortgage interest rates, a scarcity of housing inventory as people sheltered in place and held off on listing homes for sale, and increased homebuying competition driven by a sudden dominance of remote work.

“In 2021, the nation sold more homes than it had in the last five years,” says Scott Bergmann, an agent with Realty One. “One of the biggest reasons home prices shot up so much was the low interest rates, which encouraged and excited more buyers to jump into the homebuying market. When more home buyers jumped into the market that increased demand—but supply did not increase…so that meant buyers were competing heavily for a home purchase, and a lot of buyers had to pay quite a bit over asking price, in order to be the front-runner with home sellers.”

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Because buyers stretched themselves so much to beat their competition, offers of $50,000 or more over asking price became commonplace. Fast-forward to 2022, and the result is a median home sales price that’s climbed to $397,549 across the country, which combined with more recent mortgage interest rate increases, is a significant burden for many prospective home buyers.

How interest rate increases are impacting affordability

Interest rates are the other major piece of the puzzle when it comes to housing affordability at the present moment. Over the past year, the Federal Reserve has increased the federal funds rate six times, which in turn, has driven up the cost of consumer borrowing, including for mortgages.

According to Redfin, interest rates as of January 2022 were still relatively low, at an average of 3.4%. But by October of this year, they had reached an average of 6.9%. That change has had tremendous fallout for buyers and monthly mortgage payments.

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“In January, you could buy a $400,000 home and have a principal and interest payment of $1,550 per month at 3.125%. Now that rates are around 7%, a buyer’s monthly mortgage would increase by roughly $800 per month,” says Derek Amos, senior mortgage loan originator with Mutual of Omaha Mortgage.

The bad news, at least for the short term, is that rates are likely to keep climbing before they start heading downward again. The Federal Reserve is expected to announce another rate hike in mid-December. “Rates will eventually come down. But it is possible that they will get closer to 9% before that happens. They will never be where they were in 2021,” says Amos.

How much do you need to make to afford a $400,000 home

So with all of these factors in mind, how much do you need to earn in order to reasonably afford the current median sales price for a home in the United States?

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According to Brian Walsh, a CFP and senior manager of financial planning for SoFi, a fintech company, your net, or take-home, pay should be roughly between $10,500 to $11,000 per month to afford a $400,000 house. As an annual salary, that would amount to between $165,000 to $195,000 depending on your state of residence, tax filing status, and other withholdings, Walsh said.

Walsh’s calculation is based on several cost assumptions.

“The average monthly payment for a $400,000 home is $3,037,” says Walsh. “That’s based on the typical first-time homebuyer down payment of 7%, average interest rate of 6.61%, average property tax rate of 1%, average homeowners insurance of $140 per month, and average Private Mortgage Insurance of 0.6%.”

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Walsh’s salary guideline is also based on the idea that a mortgage payment, including property taxes and insurance, should be no more than 28% of your gross income. This recommendation, however, may or may not be appropriate depending on your other financial commitments and debt.

“If you have other major expenses such as debt payments or childcare, it may be a little more challenging to follow this rule of thumb,” explains Walsh.

It’s also important to point out that the monthly mortgage payment figure Walsh cited for a $400,000 home can vary significantly depending on nearly all of the variables used in his calculations. For instance, if a buyer brings a larger down payment to the table, that will reduce the amount being borrowed and thus the amount of monthly mortgage payments.

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In addition, if a buyer has a down payment greater than 20%, Private Mortgage Insurance requirements are typically eliminated, removing that cost from the equation. The location of a home also impacts overall costs including the property tax burden and insurance expenses.

Bottom line, says Walsh? It is important to run the numbers based on your budget and unique circumstances. You can use a mortgage calculator to plug in your numbers to see exactly how much home you can afford.

But he adds, there’s no denying homebuyers are in an increasingly difficult position as home prices climb.

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“Borrowers will either need to have higher incomes or make larger down payments to keep their debt-to-income level reasonable,” concludes Walsh.

The takeaway

As the real estate market continues to evolve, so too do the salary demands on home buyers. Bringing a larger down payment to the table will be helpful in the current environment, but no matter how much money you bring to the sale, make sure to run the numbers carefully and confirm that a mortgage payment fits comfortably within your income and budget.

This story was originally featured on Fortune.com

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