How much income do I need to buy a home?

“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

Income Calculator

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

Next steps

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.