How much income do I need to make to buy a $600,000 home in New Jersey with only 3% down payment?

As a NJ mortgage broker, we get mortgage loan preapproval questions every day.

The purpose of this article is to explore how your income affects your purchase power (i.e. your maximum purchase price).

If you are pursuing a primary residence purchase in New Jersey, there are several loan options you may want to consider, including Conventional Mortgage Loans, FHA Mortgage Loans, VA Mortgage Loans, and Non-QM / Non-Traditional Mortgage Loans. Each one of these loan programs has its own qualification requirements, and for this article we will only consider a Conventional Mortgage Loan. If you need mortgage advice or have questions about mortgage preapprovals or qualifications for one of these other loan types, please don’t hesitate to call us – 973.453.2472.

Let’s consider a buyer pursuing a Conventional Mortgage Loan. First, we need to answer this question: “What is the typical monthly payment for a $600,000 home purchase in New Jersey?”

To calculate the total monthly payment, we need to consider several factors:

1.      Principal and Interest Payment – This is based on the loan amount, the interest rate, and the loan term. Given the example detailed below, the principal and interest payment is $3,970.

a.      Loan Amount – This is calculated as the Purchase Price ($600,000) minus the down payment. The smallest down payment allowed for Conventional Loans in New Jersey is 3% of the purchase price ($18,000 in our example). The Loan Amount borrowed is $600,000 - $18,000 = $582,000.

b.      Interest Rate – Interest rates vary each day. For our example, let’s use 7.250% as an example interest rate.

c.       Loan Term – Most clients are choosing a 30-year fixed rate loan right now, so let’s use this for our example.

2.      Property Taxes – Property taxes in New Jersey are much higher than in other states. Let’s use 2.125% as an estimated tax rate. Property taxes on the average $600K home in Northern New Jersey at 2.125% tax rate would be approximately $12,750 annually, or $1,063 per month.

3.      Home Insurance – Home Insurance costs in New Jersey have increased from 2022 to 2023. A good estimate for the annual premium on a $600,000 home will be about $1,080 per year, or $90 per month.

4.      PMI – PMI = Private Mortgage Insurance. PMI is applicable on conventional loans with less than 20% down payment, and the cost varies based on credit score, number of borrowers, amount of total monthly debt vs income, property type, and many other factors. The cost of Private Mortgage Insurance varies between lenders and the best mortgage brokers in NJ, so if you are shopping for a new home, please be sure to shop your PMI cost in addition to shopping your interest rate. For our example, we will assume a 730 credit score with a monthly PMI cost of $267.

5.      HOA – In our example, this property is a single-family home, so there is no condo-related fee for a homeowners association.

The total monthly payment in this example would be:

To determine the minimum qualifying income amount, we have one more step to complete. This step involves totaling up all monthly debts that appear on the credit report and adding in a few other miscellaneous debts to determine the total other debt that is carried by the borrower (other than the new housing payment). Here is an example list of other monthly debts:

·         Credit card payments (only count the minimum)

·         Student loan payments (if in forbearance or deferred, count either 0.5% or 1.0% of the outstanding balance depending on the loan program)

·         Personal loan payments

·         Auto loans or lease payments

·         Collections (count the minimum payment amount)

·         IRS Delinquent taxes (count the amount listed on the approved IRS repayment plan)

·         Alimony / Child Support (count the amount on the court order or divorce decree)

·         Other real estate that is owned (calculating the amount of income/debt for other properties is complex, and if you own other property, it’s best that you contact the best mortgage broker near me).

In our example, we will include $900 of total monthly debt, and assume this buyer has no other properties that they own.

A conventional loan with 3% down payment will have a maximum Debt-to-Income Ratio of 45%. This is calculated by dividing the sum of the new house payment and all other debts into the buyer’s monthly income.

To calculate the minimum monthly income, we can do the opposite. Add the total monthly debt and divide by 45%.

$5,390 + $900 = $6,290

$6,290 / 0.45 = $13,978

So for this borrower with $900 in monthly debt, to qualify for a single family home purchase of $600,000 with 3% down payment, 730 credit score, taxes of $12,750, insurance of $1,080, and PMI of $267, they will need $13,978 of monthly income.

To calculate the annual income required, just multiply $13,978 x 12 = $167,736.

What if this same borrower wanted to buy a $700,000 home? How much income would be needed?

Using the formulas from our above example and adding $60 per year more for home insurance, we would determine the monthly payment for a $700,000 home to be:

$6,278 + $900 = $7,178

$7,178 / 0.45 = $15,951

$15,951 x 12 = $191,413

The total annual income required would be $191,413 to buy a $700,000 property.

This result: “I only need $24K more income per year to qualify for a $100K larger purchase price” may be surprising to some readers of this article!

A more helpful summary is that for every $100 of extra income that you earn each month, you qualify for a $5,068 higher purchase price. This comparison of income vs purchase price is the best way to measure a buyer’s ‘Purchasing Power’.

This rule of $100 of monthly income for every $5K higher in price is only applicable for homes in New Jersey priced between $500K and $750K (due to many factors, including required down payment percentages, PMI rates, debt-to-income requirements, home insurance costs, etc).

If you need help calculating your mortgage loan qualification or mortgage preapproval amount, or if you have questions about this article, please call us today – 973.453.2472.