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.
Current Mortgage Refinance Rates on a $260,000 Fixed-rate Mortgage
The following table highlights locally available current 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.
Debt-to-income Mortgage Loan Limits for 2020
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. Higher DTI typically equates to a higher rate of interest.|
|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 & sustenance 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.
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 the funds lended at 5% APR. ARM loans may be easier to qualify for since they often come with a lower teaser rate initially, but many homeowners end up surprised when rates reset higher on ARM loans after a few years making their original payments. Most homeowners prefer fixed loans for their predictibility.
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 envirnomental 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 to 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 a