Explore your mortgage options
Buying a house can be very exciting. It’s a milestone many of us dream of. But stubbornly high home prices and rising interest rates are making many of us stop and wonder whether we earn enough income to buy a house.
With so many variables in play (think: purchase price, loan type, location, mortgage rates), there are no universal income rules per se. What’s important is to have a firm grasp of your finances and financial goals.
If you’re wondering how much income you’ll need to afford the house you want, we can offer a well-tested rule of thumb you can use and outline the most important factors to keep in mind.
Determining How Much Income You’ll Need To Buy a House
When you apply for a mortgage, one of the first things a mortgage lender will do is look at your income and income history. Before issuing a mortgage, lenders want to feel confident about your ability to cover your mortgage payments.
To figure out how much you need to earn to buy a house, ask yourself these questions:
How much of my monthly income will go toward my mortgage?
A general rule of thumb is that you shouldn’t spend more than 28% of your gross monthly income on your monthly homeownership costs. This includes your monthly mortgage payment, which is a combination of your monthly mortgage principal, interest, property taxes, homeowners insurance and (if applicable) mortgage insurance.
Let’s say you make $120,000 a year. Your gross monthly income would be $10,000. According to the 28% rule, your maximum monthly mortgage payment would be $2,800.
There will always be exceptions to this rule, but it’s a good start to figuring out how much you need to earn to afford the home you want. And you can leave the math to us. We’ve got a mortgage calculator you can use to determine the maximum mortgage amount you can afford.
Find out what you can afford.
Research what your monthly payment might look like with our intuitive mortgage calculator.
What is my debt-to-income (DTI) ratio?
Your debt-to-income (DTI) ratio is another important calculation. It measures how much money you make against how much you pay every month to cover your fixed monthly debts.
Fixed monthly debts can include rent or mortgage payments, utilities, personal loans, credit card bills, auto loans, student loans, etc. You may not qualify for a loan if mortgage lenders believe your existing debt obligations are too high.
The qualifying DTI ratio will vary by lender and type of mortgage you are hoping to secure. But for most conventional loans, lenders prefer borrowers with a DTI of 36% or less.
If your gross monthly income is $10,000, your DTI should be $3,600 or less. If your mortgage payment is $2,800, your other monthly debts shouldn’t exceed $800.
That said, some lenders can accept a DTI ratio as high as 40% – 50%, but you may need to make a larger down payment.
Do I have 2 years of documented income?
Most lenders want 2 years of verified income. Recent pay stubs are typically accepted as proof if you work 9-to-5 and receive a W-2. You may need to apply for a bank statement mortgage if you’re self-employed. With a bank statement mortgage, you’ll verify your income with alternative paperwork, including recent bank statements.
What are your sources of income?
Your chances of qualifying for a mortgage may increase if you have other sources of income. These sources of income can include:
- Rental or property income
- Pension or annuity income
- Social Security and disability benefits
- Alimony or child support payments
- Trust fund income
- Investment income
- VA benefits
- Foster care payments
Keep in mind, a lender may treat alimony or child support and investment income as a less reliable source of income compared to others. Take stock of your multiple streams of income. It may make a difference when you apply for a mortgage.
What size down payment can I afford?
Qualifying for a mortgage may be a much easier enterprise if you can make a large down payment. In addition to having a smaller loan to pay off, lenders will often offer better terms with a larger down payment.
Can I cover the closing costs?
You’ll also need to cover your closing costs which can add up to 3% – 6% of the total loan amount.
What If You Can’t Afford to Buy a House With Your Current Income?
If you’re worried you won’t qualify for a mortgage with your current income, consider these steps:
Increase your income
Okay, we know. Easier read than done, right? But increasing your income can help up your chances of getting approved for a mortgage. Picking up a second job or side hustle – even for a limited time – can help make your mortgage application more appealing.
Because a preapproval estimates how much you’re qualified to borrow, if you find a home below your preapproved maximum, you’ll probably be able to afford it.
If you’re struggling to qualify for your dream home, you may need to rethink your dream home. The $500,000 property you had your eye on may have ticked off your boxes, but that doesn’t mean there aren’t great, less expensive homes to choose from.
Save money for a down payment
If you must pause your home buying aspirations, don’t stop saving. Setting aside more money and building your cash reserves can help even if your income stays the same.
Improve your credit score
A higher credit score can also help make your mortgage application more appealing to potential lenders. Paying off debt and making on-time payments will help to maintain your credit score or help it climb.
Buy the House You Can Really Afford
There is no exact number we can offer to tell you how much income you need to buy a home. But we can tell you that the higher your income is and the less debt you have, the easier the mortgage approval process should be. Use the 28% rule of thumb to estimate how much home you can afford and create a realistic budget to help get you closer to buying a new house.
The Short Version
- To qualify for a mortgage, you must prove you have enough income to make your mortgage payments on time and in full
- Most lenders want 2 years of verified income
- Most lenders prefer that your monthly mortgage payment, including taxes and insurance, doesn’t exceed 28% of your gross monthly income