“While the mortgage loan is secured against the house, it is really made against your income,” advises online real estate company Zillow.1 That’s why examining your income is essential when shopping for a home. Your income level will determine whether or not you qualify for a loan, as well as the size of the mortgage you can get.2
How to calculate how much income is needed
Armed with the following details, the Guild Mortgage Income calculator will give you a good idea of the total income needed to qualify for the home you would like to purchase:
- Sale price of the home – the purchase or listing price of the house you want to purchase
- Down payment – the up-front amount you are planning to put down on the purchase of the home
- Estimated interest rate – the rate that you expect to receive on your financing
- Property state – because property tax and hazard insurance vary by state, enter the location where you are buying for a more reliable estimate
- Estimated total monthly debts – the total amount of debt that you pay each month, not including other payments that will disappear when you move like rent
Understand your front-end ratio
In our previous article about buying a home when you’re in debt, we reviewed the importance of adding up your liabilities to calculate your total debt-to-income ratio. As a potential borrower, there’s another key ratio to keep in mind. Most lenders require a borrower to keep housing costs at or below 28% of their pretax income. This ratio is known as the front-end ratio. Mortgage-related debt includes your “monthly mortgage payment plus property taxes, homeowners insurance, and HOA fees.”3 This percentage, along with your total monthly debt payments, is how the income needed to buy a home is determined.
Consider your personal criteria
Lenders look at more than just debt and income level when approving a mortgage loan. They may also check your credit score, look at your employment history, as well as take your assets and liabilities into account.45 Beyond lenders’ requirements, Investopedia recommends that potential borrowers also examine their own criteria and financial situation when contemplating their ability to pay a mortgage. Keep the following questions in mind:
- Expenses – will you have to pay for college tuition soon? Do you have plans for a new vehicle, or do you take an annual family vacation
- Home maintenance – are you buying a fixer-upper that will require expensive upgrades? Will you need to purchase new furniture?
- Job stability – is your job stable? Do you have back-up reserves if you lose your job or can you easily find another position?6
Did you determine with the affordability calculator that your salary is in line with the income needed to qualify for a mortgage? Your recommended next step is to get a more accurate estimate by requesting pre-approval. If the monthly income you calculated is more than your salary, you do have options. For example, choosing a less expensive home, extending the loan term or saving more for a down payment. Contact an expert loan officer to review the best loan process for your situation.