How Much Income do I Need to Earn to Buy a Home?
Unsure if you can afford your dream home? Use this free tool to see your minimum required income. Current mortgage rates are shown beneath the calculator.
By default this calculator uses a 28% front-end ratio (housing expenses versus income) & a 36% back-end ratio (monthly debt payments versus income), though these are variables in the calculator which you can adjust to suit your needs & the limits set by your lender. 28/36 are historical mortgage industry standers which are considered ideal by lenders & are still used in some automated loan underwriting software programs. Click here for more information about DTI limits for all major loan types.
Debt-to-income Mortgage Loan Limits for 2017
Generally speaking, for most borrowers, the back-end ratio is typically more important than the front-end ratio. Here are DTI limits for popular mortgage loans. The soft limits may allow approval using automated underwriting software, whereas the hard limits may require manual approval and other compensating factors like a high credit score or perhaps even a co-signer. If you are seeking a loan for a format without a front-end limit then you can set the front-end box to 100 for 100%, so that the calculator bases your loan limit on the back-end limit you enter.
|Loan Type||Front End||Back End||Hard Limit||Notes|
|Recommended||28%||36%||n/a||Ideal borrower, obtaining a great APR.|
|Conventional||most lenders look at back-end ratio||36% to 43%||45% to 50%||Each lender decided based on a variety of factors.|
|FHA||31%||43%||56.99%||Requires compensating factors to get approved at a high ratio.|
|VA||most lenders look at back-end ratio||41%||~ 47%||Each lender decided based on a variety of factors for each veteran. Lenders have to explain why they approve any loan above a 41% limit. Basic housing & sustience allowance count toward qualifying.|
|USDA||29%||41%||41%||Loans geared toward serving low-income people in rural markets with incomes below 115% of the local median income. More details here|
No one wants to be turned down for financing, so make sure you know how much you can afford before you go shopping for a mortgage lender.
You may be the most reliable, righteous and responsible person the world has ever seen, but money lenders see you as a big financial risk on two legs. After all, if you bite off more than you can chew and end up defaulting, they lose money.
As you can imagine, lenders don't like to lose money, so the purpose of your loan application is to prove them wrong.
The first thing to note is how serious the application process is. A home is the largest purchase you will likely ever make, and your mortgage is the biggest personal debt you will likely ever incur.
Lenders are looking for a sure thing, an open and shut case. They just want to see that you have sufficient income to cover your mortgage payments and other obligations, with enough left over to live comfortably. They're not looking for the drama and suspense of debtors who can barely keep afloat.
That said, now is not the time to start fudging about your finances. A mortgage application opens up your bank accounts, credit history, personal income and investment portfolio to close scrutiny. You need all the proof a banker asks for, and you need to be completely honest.
Remember, if any of your figures are questionable or unsubstantiated, you will either get saddled with a higher interest rate, or you will be shown the door.
What Lenders Need To See
They need to see financial stability and a good track record. They want to see how risky you are as a borrower, and they want to minimize those risks.
On the other hand, financial institutions and mortgage companies have to fund some homebuyers because that's how they stay in business. Your mission is to show them that YOU are a good investment for them.
They use many factors to determine how risky a person is. That level of risk determines how much money they're willing to offer, and what interest rate they will charge. Here are three of the main factors they use:
- How much money do you make? The amount of money you make every month must be enough in their eyes for you to be able to cover your mortgage as well as meet your other financial obligations. If you don't make enough money for their strict requirements, you won't stand a chance.
- What is your credit score? If ever there was a time when your credit score counted, this is it. This is the reason we all need to monitor to our credit scores regularly, and try keep them blemish-free. The higher your score, the more house you'll be able to buy, and the lower your interest rate, down payment and monthly payments will be.
- What do you do for a living? Lenders want to see that you're a good breadwinner, and that your history shows steady and long-term employment. Nobody likes a quitter, so if you have a history of job hopping or lapses in employment, you'll have some explaining to do. If you can't hold down a steady job, you're going to have trouble making the payments.
Why Is Income So Important To Lenders?
Simply stated, if you don't earn enough money to cover your current obligations plus the amount you are asking to borrow, no one will lend you money to buy a home. To a lender, doing so is like throwing good money after bad.
So do you make enough money, or not?
The only way to tell for sure is to run the numbers. By using the above calculator, you can see exactly what your financer sees. You will know right away if you earn enough to afford the home you really want.
Let's say you have your heart set on a charming $350,000 Tudor house on a quiet cul-de-sac, and you make $110,000 a year. Typically, you spend about $1,000 a month to repay personal loans, and about $500 a month to finance your car and auto insurance — this is your monthly debt obligation before you factor in the projected monthly mortgage contribution.
Enter those figures into the above calculator. If you have a respectable credit score of 680 or higher, you can expect a 6.5% interest rate on a 30-year loan.
One click of the mouse let's you know: No!
The calculator tells you that you need to make $133,000 a year in order to qualify for a $350,000 loan. You can experiment with the above calculator, entering different loan amounts, monthly obligations and interest rates, until you see a minimum income requirement in your range.
If you juggle those numbers, you'll find that a borrower with an income of $110,000 a year and $1,500 in monthly debts is only eligible for a loan of up to $235,000.
What Is My Debt-To-Income Ratio?
Your monthly debt obligations include money you owe on credit cards, car notes or personal loans, and it is a major consideration for lenders. If you're swimming in debt, they fear the loan will go underwater.
A debt-to-income ratio merely shows how much money you owe compared to how much you make. You can improve your ratio by paying off a few minor obligations before you apply for a mortgage, because it makes a big difference.
In the example above, let's make the debt-to-income ratio more favorable by paying off a few smaller obligations. By bringing your monthly obligation down $800, you can now afford your Tudor paradise on the $110,000 you are currently earning.