How much income do I need to buy a house?

Are you concerned that your income will limit your ability to buy a home? It’s important to know that your earnings don’t have to be a deal-breaker. The amount of money you earn is only one of several factors considered in getting a mortgage. The exact income you’ll need to buy a house will vary depending on how much you want to spend on your new home.

Which factors determine your housing budget?

There is not necessarily a minimum income you need to afford a house, and lenders will consider much more than just your paycheck when you buy a home. While your paycheck does impact home affordability, most lenders will allow you to qualify with a debt-to-income ratio of up to 50%. Your debt-to-income ratio (DTI) and your ability to make mortgage payments are considered along with other factors like your credit score and how much you have saved for a down payment.

A great place to start is to get a preapproval, especially if you aren’t sure whether you can get a mortgage on your current income. A preapproval is a letter from a mortgage lender that tells you how much money you can borrow. When you get a preapproval, lenders look at your income, credit report and assets. This allows the lender to give you an estimate of how much home you can afford.

So, what do lenders look for when you want to borrow? For starters, they’ll take a look at your monthly income and your DTI.

Monthly income

If you’re on payroll, you’ll likely just need to provide recent pay stubs and W-2s. If you’re self-employed, you’ll need to submit your tax returns as well as any other documents the lender requests.

Ideally, you’ll be able to show your lender that you have a stable work history with very few periods of unemployment. This shows your lender that you’re reliable and will be more likely to make your mortgage payments on time each month.

Lenders don’t just look at your salary when they calculate income. Different lenders may choose to include different income sources. Some other sources of income they might consider include:

• Commissions
• Overtime
• Military benefits and allowances
• Alimony payments
• Investment income
• Social Security income
• Child support payments

Your lender will examine the history of your received income and consider how likely it is to continue. For example, if your alimony agreement says you’ll only receive payments for 1 year, your lender probably won’t consider it.

Debt-to-income ratio

Lenders use debt-to-income ratio (DTI) when deciding how much they’ll be willing to lend you. Your DTI is your total monthly recurring debt payments divided by your total monthly income. Your lender expresses your DTI as a percentage.

For example, let’s say you have three bills you pay every month:

• $800: Rent
• $150: Credit card payment
• $200: Student loan payment

Let’s also say that your total monthly pretax income is $3,000. Your DTI is equal to your debts divided by income. In this case, it’s $1,150 / $3,000. That makes your ratio about .3833, or 38.33%. This gives you your current DTI so you can see where you stand before applying for a mortgage. Keep in mind that lenders won’t look at your current rent payment when calculating your DTI unless you plan on staying in your rental after you buy your new home. Instead, they’ll look at your recurring debt payments and your new mortgage payment to determine your actual debt-to-income ratio.

Your DTI tells lenders whether you can afford to take on another debt. Lenders generally like to see a DTI of 50% or less. If your DTI is higher than 50%, you may have trouble getting a loan. If your DTI is lower, you can borrow more money.

If your ratio is too high, start looking for places where you can cut back on your monthly budget or increase your income.

How other financial considerations influence how much income you need to buy a house

Your monthly income and DTI are just two factors that lenders look at when you apply for a mortgage. Your credit score and the size of your down payment are also two really important factors.

How credit score impacts how much income you need

Your credit score is a numerical rating that ranges from 300 – 850 and tells lenders how responsible you are when you borrow money. If you have a high credit score, it’s probably because you pay back your bills on time and avoid debt as much as possible. If you have a low credit score, it may be because you miss payments or carry high balances on your credit cards each month.

A high score will give you access to lower interest rates and more lender choices. If you have a low score, you may have trouble getting a loan.

Lenders look for a credit score of about 620 and up when you apply for a conventional loan. If your score is below 620, you may want to consider applying for government-backed mortgages like FHA loans and VA loans.

If your credit score isn’t where you’d like it to be, you can take steps to raise your score over time.

How down payment amount affects how much income you need

Your down payment is the amount of money you put down on your mortgage. Your down payment is due during closing and is usually the most expensive closing cost you need to plan for. Lenders express down payments as a percentage of the total loan. For example, if you buy a home worth $100,000, a 20% down payment is $20,000.

You might have heard you need 20% down to buy a home. This number is often quoted because 20% down is the minimum you’ll need to avoid buying private mortgage insurance (PMI) – but it’s not the minimum you need to get a loan.

A mortgage calculator can help you figure out how your down payment amount affects your monthly payment amount.

You may qualify for a mortgage with just 3% down on a conventional loan. If you choose an FHA loan, you’ll need to put at least 3.5% down. You can buy a home with 0% down if you qualify for a VA loan or a USDA loan.

What percentage of your income should you put toward your mortgage?

It’s also important to make your own decisions about the percentage of your income you should dedicate to a mortgage. It’s typically not recommended that you put more than 28% of your income toward your mortgage, no matter how stunning the dream home might be.

What are other costs associated with buying a house?

Your monthly payment and down payment aren’t the only costs associated with buying a home. You also need to pay closing costs when you finalize your loan. Closing costs are extra fees that go to your lender for the services it provides.

Appraisal fee

Your appraisal fee covers the cost of a professional appraiser’s report on the home’s worth. Mortgage lenders require appraisals to ensure that the house is worth the amount they’re lending. You can pay this upfront or at closing.

Title insurance

Title insurance protects you and your lender against third-party claims to your home’s title. Unlike other types of insurance, you only pay title insurance once – during closing – and you’re protected as long as you own the home.

Origination fee

The origination fee covers the cost of processing your loan.

Attorney fees

In some states, you need a real estate attorney to finalize your title transfer. Attorney fees can vary significantly from state to state.

Property taxes

During the closing, you pay the property taxes due from the date of closing until the end of the tax year. Assuming the seller has already paid for the entire year in advance, you’ll simply pay your prorated share.

The specific closing costs you’ll pay depend on your state’s requirements and your lender. As a general rule, expect to pay 3% – 6% of your home’s purchase price in closing costs. For example, if you buy your house for $150,000, the closing costs could be anywhere from $4,500 to $9,000.

The bottom line

Even though a lender looks at your income stream when you buy a home, there’s no set income requirement to buy a home. A mortgage preapproval is a good first step to learn how much you can afford to spend on a home. A preapproval is also a smart move because you’ll be able to prove to sellers that you can get a loan.

It’s important to note that income isn’t the only factor that lenders consider when deciding whether you qualify for a loan. Your DTI, down payment and credit score are also important. If you’re ready to take the next step toward homeownership, start the mortgage application process with Rocket Mortgage^®.