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 San Diego 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 housing plus 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.
Current San Diego Mortgage Refinance Rates on a $260,000 Fixed-rate Mortgage
The following table highlights current San Diego mortgage rates. By default the table lists refinancing rates, though you can click on the "Purchase" heading to see purchase money mortgages. The "Products" drop down menu lets you select various loan terms & other lending options like hybrid ARM loans.
The Homebuyer’s Guide to Qualifying for a Mortgage
Buying a house is one of the largest purchases people make in a lifetime. It’s an expensive proposition, with most consumers relying on loans to acquire their own home. And since mortgage payments typically take decades to pay down, it requires financial commitment and a level of stability. With this in mind, mortgage lenders assess your financial disposition and creditworthiness to make sure you can afford to make regular payments.
The following guide will walk you through the basic qualifying process to secure a mortgage. We’ll also rundown the primary financial requirements you must satisfy before you can buy a home. This includes factors such as your credit score, income, and debt-to-income ratio, to name a few. Finally, using our calculator above, we’ll provide an example of how you can estimate your required annual income in order to purchase a home with a specific amount.
Understanding the Mortgage Qualifying Process
Once you’re ready to take a mortgage, you must undergo a two-step qualification process to secure loan approval. Real estate agents advise homebuyers to go through the pre-qualifying and pre-approval process with a lender. In both procedures, lenders evaluate your creditworthiness which is your ability to repay your loan. These steps will help you know if you meet minimum qualifying standards, as well as which aspects of your financial health to improve. For first-time homebuyers, getting pre-qualified helps you gauge your financial readiness for a home purchase.
Pre-Qualifying vs. Pre-Approval
Mortgage-pre-qualifying and pre-approval may seem like similar procedures. Some people may even use these terms interchangeably, which make it confusing for buyers. However, these are two entirely different processes. Pre-approval has a greater impact on your ability to close a deal compared to pre-qualification. Note their differences below:
Pre-Qualification: Pre-qualification is a casual estimate that determines how much money you can borrow for a mortgage. This is a general estimate, not an actual amount. Expect a lender to ask you about your income, assets, credit score, and existing debts. It’s an initial assessment based on self-reported information, which means they do not verify with your credit bureau or employer. Thus, it does not impact your credit score. Prequalification can be done online or over the phone, and usually takes one to three days. It’s a great way to know if you satisfy minimum mortgage requirements.
Securing Pre-Approval: After pre-qualification, you must obtain pre-approval. This a conditional guarantee from a lender to formally offer you a mortgage. You must submit to thorough credit and background checks from your lender before you can obtain a pre-approval letter. They verify your income, credit score, credit history, and even your employment status. It’s a formal assessment of your creditworthiness based on official financial documents. Under this step, you must fill out a mortgage application and include your Social Security number. The pre-approval process can take a couple of days if you have complete documents and a good credit profile. However, if you have credit issues on your record, it can take up to a few months.
Make sure to prepare the following documents for the pre-approval application:
- At least 2 years of federal tax returns
- Pay stubs, at least 30 days
- W-2 statement or 1099 from employers
- Quarterly statements from savings and checking accounts
- Proof of bonuses, alimony, social security & other income
Expect lenders to confirm your employment status and income by contacting your employer. While many lenders request for over-the-phone confirmation, some might ask for email verification. A lender will also conduct a hard credit check on your credit report. This can impact your credit score especially if you get multiple hard inquiries. However, if you’re applying to different lenders within a span of 45 days, the credit checks will be considered a single inquiry. To avoid multiple hard credit inquiries, make sure to shop for lenders within a short span of time.
What if I’m Self Employed? Lenders verify your financial background by evaluating your IRS tax returns transcripts. Typically, it’s more challenging to obtain a mortgage when you’re self-employed. However, once you’ve proven you have high income and sustainable sources of funds, you’ll get pre-approved. Expect lenders to be more thorough about checking your financial background and the stability of your income stream. It’s also important to present ample cash reserves, which assures lenders you can continue paying your loan in case of economic emergencies. Cash reserves function as a financial cushion that will keep you afloat while you’re looking for a new stable source of income.
What Happens Once I Get Pre-approved? Once you receive your pre-approval letter, it’s usually valid for 60 to 90 days (it will be specified in your letter). This includes an exact loan amount together with a potential interest rate. Most homebuyers who obtain pre-approval are serious about buying a house within the said time. Majority of sellers also request for a pre-approval letter before closing a deal. Likewise, if you exceed the 60 to 90 day time-frame, it will no longer be valid. You must go through the pre-approval process all over again. It’s time-consuming, so make sure to dedicate enough time to find a house.
Why Mortgage Pre-Approval is Crucial
Since pre-approvals are based on confirmed financial information, it’s a more reliable indicator of creditworthiness. Sellers also know you’ve undergone more thorough credit checks from a lender. A pre-approved buyer provides more concrete financial dependability compared to a pre-qualified one. Thus, you have greater chances of obtaining a mortgage deal when you negotiate an offer.
What Mortgage Lenders Look for in Borrowers
To be eligible for a home loan, you must meet certain standards that indicate you are a capable borrower. As previously mentioned, these aspects include your income and assets, debt-to-income ratio, and credit score. By evaluating these key financial areas, it shows how much risk you might impose on a lender. The level of risk determines how much money they are willing to offer, as well as how much interest rate they should charge. Overall, you must prove that you are a worthy investment to qualify for a mortgage.
Do You Have Enough Income?
To afford a home, you must have enough income to cover your mortgage payments as well as your usual expenses and other debt obligations. This is a big deal because it reveals how predictable your finances are, which is crucial in making monthly payments. You have increased chances of securing approval if you have a stable long-term job with high income, which is why lenders verify your employment status.
Apart from evaluating your income, you may also submit any additional proof of income. Note that extra income is only accepted by lenders if it can get funds from those sources for at least three years. Here’s a list of eligible sources of additional income:
- Payment from part-time work
- Payment from overtime work
- Bonuses from work
- Income from Investments
- Income from pensions
- Social Security benefits
- Child support or alimony benefits
- Military allowances or benefits
Lenders will also assess your assets or cash reserves. If you have a significant amount in your savings or IRA account, this helps you obtain approval. Having high-value assets lowers your risk of defaulting on your loan, which is a plus for lenders. You can present the following assets for loan approval:
- Savings and checking accounts
- IRA accounts
- 401(k) accounts
- Stocks, bonds, and mutual funds
- Certificates of Deposit (CD)
Do You Have a Good Credit Score?
Prior to purchasing a house, make sure to have a good credit rating. Credit scores are a three-figure ranking that measures how creditworthy you are as a borrower. It’s based on your credit report which details your full payment history, the amounts you owed, as well as you credit history length. It’s also a record of the types of credit you carry including old and new debts.
Credit scores range from 300 up to 850 and follow classifications based in the credit reporting agency. The most popular and widely used credit rating system is the FICO score by the Fair Isaac Corporation. The following table shows the FICO score classification and how it impacts a borrower’s mortgage rate.
|Score Range||FICO Rating||Impact on Mortgage Rates|
|800 – 850||Exceptional||Secures the lowest rates.|
|740 – 799||Very Good||Obtains better than average rates.|
|670 – 739||Good||Those likely approved for credit.|
|580 – 669||Fair||Approved but usually charged a higher rate.|
|300 – 579||Very Poor||Those usually not approved for credit.|
As you can see, borrowers with the highest scores are entitled to the lowest rates. Meanwhile, lower credit score borrowers get lower rates or may not be approved for a loan at all.
Moreover, FICO publishes interest rates with the corresponding credit score under their Home Purchase Center. As of December 4, 2020, the following table shows the national average rates for a 30-year fixed-rate loan worth $300,000. Again, a higher credit score corresponds to a lower rate.
|FICO Score||Rate (APR %)|
|760 – 850||2.412%|
|700 – 759||2.634%|
|680 – 699||2.811%|
|660 – 679||3.025%|
|640 – 659||3.455%|
|620 – 639||4.001%|
To qualify for a conventional loan, most lenders prefer a credit score of 680 or higher. Though in certain cases, some conventional lenders may approve a credit score as low as 620. However, keep in mind that lenders assign a higher interest rate if you have a low credit score. Likewise, the higher your credit rating, the more you can qualify for competitive rates. To gain interest savings, make sure to obtain the lowest rate you can find when you’re shopping for a mortgage.
Besides conventional loans, here’s a list of required credit scores for government-backed loans:
- FHA loans: A minimum of 500, preferably 580.
- VA loans: Ideally 620 and up, has flexible credit standards.
- USDA loans: At least 640. 620 for manual underwriting but processing is longer.
Increase Your Credit Score
Prior to applying for a loan, make sure to secure a copy of your credit report to review your credit status. Borrowers are allowed to obtain one free copy every 12 months. You may request a free copy at AnnualCreditReport.com.
You can increase your credit score by paying your bills on time and significantly reducing outstanding debts. It’s also best to check for errors on your credit report, such as a wrong billing address or unrecorded payments. Disputing errors to your credit bureau helps raise your credit score. Dedicate at least a year to improve your rating; credit scores may take 12 to 24 months for improvements to reflect. So give yourself enough time before applying for a mortgage.
Is Your DTI Ratio within a Good Range?
Debt-to-income ratio or DTI is a risk indicator that measures how much of your monthly salary goes to your debts. In particular, DTI ratio is a percentage that compares your total monthly debts to your gross monthly salary. Generally, a high DTI ratio means you are not in a good position to acquire more debt. Likewise, a low DTI ratio is a sign that you have enough salary coming in to pay for your mortgage and other debt obligations.
If you have a high DTI ratio, make sure to reduce it before applying for a mortgage. This increases your chances of securing approval. You can lower your DTI by paying off or reducing large debts, such as high-interest credit card balances.
The 2 Main Types of DTI Ratio
Front-end DTI: The percentage of your salary that pays for housing expenses. It includes monthly mortgage payments, property taxes, home insurance, homeowner’s association dues, etc.
Back-end DTI: The percentage of your salary that goes to housing expenses as well as other debt obligations. This includes credit card debt, student debt, car loans, any personal loans, etc.
Lenders assign different DTI limits depending on the type of loan. Most homebuyers obtain conventional loans in the market. These are common mortgages that come with thorough credit and background requirements.
Furthermore, depending on your qualifications and needs, you can also choose government-backed mortgages. These generally extend relaxed credit requirements at more affordable closing costs. Let’s briefly review the different types of mortgages below.
The Two Main Types of Conventional Loans
Conforming Conventional Mortgages: These are home loans that adhere to loan limits set by the Federal Housing Finance Agency (FHFA). As of 2021, the maximum conforming limit for single-family homes throughout the U.S. continental baseline is $548,250. For example, if your loan amount is $400,000, your mortgage is considered a conforming conventional loan. Conforming limits are adjusted every year by the FHFA. Make sure to check their website to know the current loan limits.
Non-conforming Conventional Mortgages: These types of loans surpass the set conforming limit prescribed by the FHFA. Conventional mortgages are also called jumbo loans, which pertains to the large amount borrowed by homebuyers. These are used by wealthy consumers looking to purchase homes in specified high-cost areas. Conforming limits for these high-cost locations are set 50% higher from the baseline limit. As of 2021, this was set at $822,375 for single-family homes. Since larger loans mean greater risk for lenders, jumbo mortgages come with more stringent qualifying procedures for borrowers.
Take Note: Conventional loans require private mortgage insurance (PMI) if you make less than 20% down payment on the home’s purchase price. PMI is usually included into your monthly mortgage payments, costing between 0.5% – 1% of your loan amount annually. This is an added cost that protects lenders in case borrowers default on their mortgage. It’s imposed for a certain period, which is removed once your mortgage balance is 78%.
Meanwhile, borrowers have the option to choose from the following government-backed loans:
Government-Backed Mortgage Programs
FHA loans are backed by the Federal Housing Administration: These mortgages were made for homebuyers with limited income. They come with relaxed credit standards, low down payment options, and low closing costs. It’s also a viable option for first-time homebuyers who have a hard time qualifying for conventional loans.
VA loans are backed by the U.S. Veterans Affairs: VA mortgages are special loans awarded to veterans, active military members, and qualified military spouses. These loans offer flexible credit requirements as well as 100% financing for borrowers (no down payment required).
USDA loans are backed by the U.S. Department of Agriculture: USDA loans are suited for low to moderate income families looking for affordable housing in suburbs and other USDA-rural areas. It offers lenient credit qualifications, low mortgages rates, and 100% financing (no down payment is not required).
Take Note: Government-sponsored mortgages such as FHA and USDA loans charge mortgage insurance premium (MIP) to borrowers. MIP is an extra cost that safeguards lenders in case you have trouble paying your loan. It is paid both as an upfront fee and an annual fee which is usually required for the entire life of the mortgage. Unlike PMI, MIP cannot be removed once you build higher home equity. Borrowers with government-backed loans usually refinance their mortgage into a conventional loan to eliminate MIP.
As you’ve noticed, different types of loans are geared towards different consumers. Because of this, DTI requirement for different loans also vary.
Debt-to-income (DTI) Mortgage Loan Limits for 2021
Generally speaking, for most borrowers, the back-end DTI ratio is typically more important than the front-end DTI ratio. The following table shows DTI limits for different types of mortgages. 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.
|Loan Type||Front-End||Back-End||Hard Limit||Notes|
|Recommended||28%||36%||n/a||Ideal borrower, obtaining a great APR. Higher DTI typically equates to a higher interest rate.|
|Conventional||most lenders look at back-end DTI ratio||36% – 43%||45% – 50%||Each lender is chosen based on a variety of factors, such as credit score, income and assets, credit history, etc.|
|FHA||31%||43%||56.99%||Requires compensating factors to get approved at a high ratio.|
|VA||most lenders look at back-end DTI 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 & sustenance allowance count toward qualifying.|
|USDA||29% – 32||41%||41%||Loans geared toward borrowers in rural markets with incomes below 115% of the local median income. See more details here.|
Using our calculator above: If you are seeking a loan for a format without a front-end limit, 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.
Example Required Income Levels at Various Home Loan Amounts
The following table shows the required income needed to have a 28% DTI front end ratio on a home purchase with 20% down for various home values. For the sake of this calculation a 30-year fixed-rate home loan is presumed, with a rate at 5% APR.
This table also presumes a $1,000 annual homeowner’s insurance policy along with $2,500 in annual real estate taxes. Both numbers are close to the national average, though local conditions can vary widely based upon environmental risks like flooding or earthquakes, along with some states having higher property values or charging higher property tax rates.
|Home Price||Down Payment||Loan Amount||Monthly Income||Annual Income|
Home buyers with a high debt load are more likely to be limited by their back end ratio than the front end ratio. If a consumer has a high debt load before buying a home, they have a number of options to improve their chances at getting improved for a home loan:
- Extinguish Current Debts: Using the snowball method you can pay off smaller debts first, then work toward paying larger debts. Each time a debt is paid off it creates an additional sum which can be applied to the next debt. An alternative approach which pays the highest rate debts first is called the avalanche method.
- Consolidate Debts: Consolidating many high-interest debts into a single lower monthly payment can reduce your monthly debt obligations.
- Apply for a Smaller Home Loan: Qualifying can be easier if you can buy a home farther away from the city, choose a smaller home, or a home that needs some repairs.
- Use an ARM: Generally, adjustable-rate mortgages (ARM) offer lower initial monthly payments.
ARM loans may be easier to qualify for since they come with a lower teaser rate. But buyer, beware. After the initial teaser period, the rate changes annually. This means higher mortgage payments once interest rates increase. ARMs usually come in 3/1 ARM, 5/1 ARM or 10/1 ARM. For instance, if you take a 5/1 ARM, the rate starts off low and you pay the same mortgage payments for the first five years. When this happens, many homeowners end up surprised when their payments substantially increase after the introductory period.
For this reason, most homeowners prefer fixed-rate loans compared to ARMs. If your budget is tight and you can’t afford higher payments, this is the practical option. This way, you have the same predictable payments even if market rates start to increase. Many ARM borrowers also eventually refinance their mortgage into a fixed-rate loan to lock in a low rate.
Proposed Mortgage Qualification Changes in 2020
The Dodd-Frank Act amended the Truth in Lending Act (TILA) to ensure borrowers have an ability to repay. While the above DTI levels can provide a good baseline for prospective homeowners, GSE Patch rules allowed borrowers with a DTI of above 43% to have their loans considered qualifying mortgages in some cases. The Consumer Finance Protection Bureau also recommended shifting to a broader and more holistic measurement to better understand a consumer’s ability-to-repay (ATR).
Fannie Mae and Freddie Mac – Government-Sponsored Enterprises (GSE) which package residential mortgages into securities – allow higher debt levels for homebuyers with a significant student debt load. In addition, on June 22, 2020, the CFPB suggested changing consumer ATR calculation to place more emphasis on loan pricing rather than strictly relying on DTI.
Consumer Financial Protection Bureau Notice of Proposed Rulemaking:
“[T]he Bureau proposes to amend the General QM definition in Regulation Z to replace the DTI limit with a price-based approach. The Bureau is proposing a price-based approach because it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.”
Smaller loans for manufactured homes typically charge higher interest rates than larger loans for fixed dwellings. By comparing the pricing of a loan against similar loans it allows a level playing field for borrowers.
Save Enough Down Payment
Besides checking your income, debts, and credit score, it’s important to prepare enough down payment. Ideally, financial advisors recommend paying 20% down on your home’s value. This eliminates PMI cost and substantially reduces your principal loan amount. For example, in October 2020, the U.S. Census Bureau announced that the median sales price for home sales was $330,600. If this is the price of your house, you must prepare a down payment of $66,120.
In practice, however, a 20% down payment is too hefty for most borrowers. Credit reporting agency Experian reported that the average down payment for homebuyers in 2018 was 13%. Meanwhile, those who bought houses for the first time only made a 7% down payment, whereas repeat buyers paid 16% down.
Though paying a 20% down payment may not be required, it’s still worth making a large down payment on your mortgage. Here are several benefits to paying 20% down on your home loan.
- Decreases your interest rate: When you make a 20% down, the large payment reduces your loan-to-value ratio (LTV). LTV ratio measures the value of your loan compared to the value of the property securing your loan. A lower LTV ratio results in a lower interest. This allows you maximize your mortgage savings.
- Lowers your monthly payment: Paying 20% down payment considerably reduces your principal loan amount. A lower loan amount directly decreases your monthly mortgage payments. This spells good news for your cash flow, which allows you to set aside more savings.
- Removes PMI on a conventional loan: PMI is an added cost equivalent to 0.5% to 1% of your loan annually. Though it’s eventually canceled, it’s an added fee you can avoid by making a 20% down payment on your conventional loan.
- Better chances of mortgage approval: Offering a large down payment is a sign that you can save and generate large savings over time. This is attractive to lenders, which increases your chances of mortgage approval. And since you’re paying a significant portion of your loan, paying 20% down reduces risk for lenders.
- Gain home equity faster: Making a 20% down payment pays off a substantial portion of your loan. This helps you build home equity faster. If you intend to make extra mortgage payments, this will help you pay your loan sooner and shave years off your payment term.
Factor in the Closing Costs
Closing costs are fees charged by lenders to process your mortgage application. This typically ranged between 2% – 5% of your loan amount. For example, if your loan is worth $320,000, your closing costs can be anywhere between $6,400 to $16,000. This is a large sum, so be sure to include it in your budget. But the good news is closing costs can be negotiated with lenders. So make sure to talk to them about reducing your fees.
Calculate How Much Home You Can Afford
Before applying for a mortgage, you can use our calculator above. This provides a ballpark estimate of the required minimum income to afford a home. To understand how this works, let’s take the example below.
Suppose the house you’re buying is priced at $325,000. The loan is a 30-year fixed-rate mortgage at 3.5% APR. To get rid of PMI, you decided to make a 20% down payment, which is $65,000. With a 20% down, this reduces your principal loan amount to $260,000.
To qualify for the loan, your front-end and back-end DTI ratios must be within the 28/36 DTI limit calculator factors in homeownership costs together with your other debts. See the results below.
- 30-Year Fixed-Rate Loan
- Home price: $325,000
- Down payment: $65,000
- Loan amount: $260,000
- Rate (APR): 3.5%
- Annual real estate taxes: $3,500
- Homeowner’s insurance: $1,000
- Homeowner’s association dues: $300
- Vehicle payments: $500
- Credit card payments: $250
- Student loan payment: $450
- Other monthly debt payments: $200
- Front-end DTI limit: 28%
- Back-end DTI limit: 36%
|Required Salary to Qualify for a Mortgage||Results|
|Minimum Required Annual Salary||$66,107.84|
|Equivalent Monthly Earnings||$5,508.99|
|Minimum Required Income Based on 28 Front-end DTI||$66,107.84|
|Minimum Required Income Based on 36 Back-end DTI||$98,083.87|
*When you use the calculator, you can adjust the DTI limits as needed for when a lender accepts higher DTI ratios.
Based on the results, the minimum required annual salary based on the 28% front-end DTI limit for a $260,000 mortgage is $66,107.84. But note that this does not factor in your other debt obligations. Other debts are included when you calculate based on the 36% back-end DTI limit. This results in a minimum required salary of $98,083.87.
While this example shows that the minimum required annual salary is $66,107.84, a better indicator of whether you can afford all of your debts should be based on the back-end DTI calculation. This results in $98,083.87, which is not the average salary for typical homebuyers. To qualify for this loan, it’s either you increase your income or reduce your debts to qualify for this mortgage.
Since conventional lenders base your DTI on the back-end limit, you must see to it that you’re not overleveraged with debt. Thus, before applying for a mortgage, it’s best to reduce your outstanding debt. This gives you better chances of obtaining loan approval, because it lowers the risk of defaulting on your loan. It also helps to have a lot of savings if you intend to purchase a costly property.
Qualifying for a mortgage entails careful financial preparation. Lenders make sure borrowers have stable income streams and are capable of repaying their loan. Before you secure mortgage approval, lenders look for a good credit score, adequate income and assets, and a healthy debt-to-income ratio within required limits. You can only obtain a mortgage once you meet these minimum standards.
Homebuyers typically undergo two types of mortgage qualification processes, which are mortgage pre-qualifying and pre-approval. Pre-qualification is a general evaluation of your creditworthiness based on self-reported information. This provides a rough estimate of how much you can borrow for a loan. It’s a good indicator of whether you satisfy minimum requirements to qualify for a mortgage.
Meanwhile, pre-approval is a formal assessment of your credit background. Receiving pre-approval is a conditional agreement from a lender to grant you a mortgage based on verified information. Because it’s more thorough, a lender can provide you with an actual loan amount. Getting pre-approval is a sign that you’re a serious homebuyer, which is why sellers request for a copy before finalizing a deal.
To improve your chances of loan approval, make sure to improve your credit score by paying bills on time. Reducing your outstanding debt will also increase your credit score and lower your DTI ratio. It also helps to present assets such as savings or checking accounts, retirement account, or any additional source of income. Finally, making a 20% down payment is also attractive to lenders. This even helps reduce your monthly payments and lowers your interest rate to maximize your overall savings.
San Diego Borrowers: Are You Unsure Which Loans You'll Qualify For?
We have partnered with Mortgage Research Center to help San Diego homebuyers and refinancers find out what loan programs they are qualified for and connect them with San Diego lenders offering competitive interest rates.