Do you have your eye on a $400,000 home in your area? According to the National Association of Realtors, that's well above the national median home price of $363,000. How does that affect home buyers' savings plans? How much does a down payment for a $400K house cost?

The income needed to afford such a purchase will depend on several factors, including the mortgage interest rate. The following information will help you determine how much income and down payment you need for a $400,000 home.

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How Much Income for a $400k House?

Using the 28/36 rule, a common real estate rule of thumb, you can figure out how much you need to make to buy a $400K house. According to this guideline, you should spend no more than 28 percent of your total income on housing and no more than 36 percent on debt payments.

Let's see how the 28/36 rule works with the income of $105,864 per year determined above. Divided by 12, that's $8,822 monthly, and 28 percent of $8,822 is about $2,470. For a $400,000 home purchase, you would need a minimum income of $105,864 to afford it comfortably.

Remember the 36 parts of the equation, too - what other debts do you have, such as car payments, credit cards, or student loans? Be sure to include the costs of homeownership, such as taxes and regular maintenance and upkeep, when determining a comfortable monthly payment. It's essential to maintain your house payments to afford other necessities.

Furthermore, a $400,000 home can look very different in different locations. There are markets where $400K can buy you a modest cottage, while others can buy you a veritable mansion.

According to Redfin data from February 2023, Atlanta, GA ($386,500); Charlotte, NC ($375,000); and Dallas, TX ($417,800) are popular markets with single-family home median prices near $400K. It's $400K on the dot in Phoenix, AZ.

 

What Factors Determine How Much You Can Afford?

Home affordability involves more than just a property's price. The following factors should also be considered:

• Down payment

Your monthly mortgage payments will be smaller if you make a large down payment on a house.

• Loan-to-value ratio

LTVs refer to how much you borrow from the total value of the home you purchase. The amount of down payment you put down upfront directly connects to this.

• Debt-to-income ratio

You calculate your DTI by dividing your gross monthly income by your monthly debt obligations. Lenders are more likely to consider you a risk if your DTI is high. You would earn $8,822 per month based on the income of $105,864 listed above.

• Credit score

Having a good credit score when buying a house is very important. You are more likely to qualify for better mortgage rates if your score is higher. Credit scores are also different for different types of loans.

• Type of Financing

The best way to choose a mortgage is to know your options. Several mortgage products are specifically designed for first-time buyers, military personnel, and veterans. Furthermore, many states and local governments offer down payment assistance and other programs, so research before deciding.

 

How Much Down Payment for a $400k House?

From your lender’s point of view, a down payment shows you’re committed. If times get tough, you're more likely to keep up your monthly mortgage payments if you have a large down payment. Therefore, the lender has a smaller risk of making a loss on your loan than it would with a less-invested borrower.

A bigger down payment will likely result in a lower mortgage rate, all other things being equal. Therefore, you should make a down payment on a $400K home you can easily afford.

A first-time home buyer struggling to reach the bottom rung of the homeownership ladder might have to pay 0%, 3%, or 3.5% of the home's price. If you owned your last home for a long time and made a lot of money from it, it might be 80% or 90%.

Types of Mortgages

In most cases, the type of mortgage you choose determines the minimum down payment for a $400K house.

When purchasing a home, zero down payment mortgage loans can significantly enhance your affordability. Those loans are:

• VA loans — Only available to veterans, service members, and people in closely related fields
• USDA loans — Available only to rural homebuyers with moderate or low incomes

There are also different minimum credit score requirements for different types of mortgages. A low credit score can prevent you from getting an Uber-low down payment. However, those with a score of 580 instead of 620 would only need to put down $2,000 more on a $400K house.

 

Should I make a 20% down payment for a $400k house?

Only you can answer that question. Is a 20% down payment going to cause you financial pain? How much pain are you willing to endure to benefit from such a down payment?

Because those benefits are significant:

• You'll borrow less, so your total borrowing cost will be lower
• If you make a large down payment, you may be able to get a lower mortgage rate
• Lower monthly payments are associated with a smaller loan amount and a lower interest rate
• There is no need to pay expensive mortgage insurance

In other words, you should make a 20% down payment if you can comfortably afford it.

 

Down Payment Assistance Programs 

There are thousands of programs across the country that provide down payment assistance. Every one of them offers financial assistance to home buyers. Most focus on first-time buyers and those with low-to-moderate incomes. However, some are open to everyone.

You may qualify for an outright grant, a low-interest loan, or a zero-interest forgivable loan. You can find these based on your zip code.

You can also get help from other sources, such as your seller. Your family may also want to contribute to your down payment. Be honest with your lender about these things. Such arrangements are perfectly legal, but there will be some rules to follow.

 

The Bottom Line

Understanding the financial requirements for buying a $400,000 home is essential. Using the 28/36 rule, you'd need $105,864 a year to afford it comfortably. But remember other debts and homeownership costs.

You'll also need to consider that housing markets vary widely by location, so $400K can mean different house sizes based on where you live. The down payment, credit score, and mortgage type all affect what you can afford, so planning is key.