How Much Income Do I Need To Buy A House? (2024)

Income Requirements To Buy A Home

Lenders consider much more than just your paycheck when you buy a home. While your paycheck does impact the amount of home you can afford, 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.

A preapproval will give you a reasonable budget to use when you start shopping for a home. Once you know your target budget, you can browse homes for sale to see what general prices are. It’s a good sign you’re ready to buy if you find appealing options at your price range.

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. Some other sources of income they might consider include:

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.

Other Financial Considerations

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.

Credit Score

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 regularly 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.

Make All Payments On Time

About 35% of your credit score comes from your payment history. One of the easiest ways to raise your score is to make minimum payments on time every month. Consider scheduling automatic payments so you never miss a due date.

Pay Off Debt

One of the best ways to increase your credit score is to determine any outstanding debt you owe and pay it until it’s paid in full. If your overall debt responsibilities go down, you have room to take on a mortgage because you’re less of a risk in your lender’s eyes.

Avoid Closing Credit Lines

Closing lines of credit can lower your score, so don’t completely shut down any credit you have. Also, avoid opening new credit while you’re trying to buy a home. Opening new credit can put a hard inquiry on your credit report, and too many hard inquiries affect your credit score.

Size Of Down Payment

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.