Income Requirements To Qualify For A Mortgage

Image by GettyImages; Illustration by Hunter Newton/Bankrate

From conventional to government loans, there are many types of mortgages to suit borrowers with different credit scores and financial means — but while the standards vary, lenders do assess how much you make when you apply for a mortgage.

Here’s how your income can impact your ability to qualify for a mortgage.

Are there income requirements for a mortgage?

There’s no single, universal income requirement to qualify for a mortgage. It all depends on the type of loan you’re seeking, the amount you need to borrow and current interest rates.

Rather than requiring a specific amount of income, mortgage lenders review your credit history, your debt-to-income (DTI) ratio and other information about your cash flow to figure out if you can afford the mortgage you want.

Debt-to-income ratio requirements for a mortgage

To calculate your DTI ratio, divide your monthly debt payments by your gross monthly income.

Lenders’ requirements for that ratio vary by loan type:

• Conventional loans: No more than 36 percent, but can go up to 50 percent with “compensating factors,” like a bigger down payment, higher credit score or substantial reserves
• FHA loans: No more than 43 percent
• VA loans and USDA loans: No more than 41 percent

Let’s say you have a monthly income of $6,000. Your debts include a $300 student loan payment, a $200 car payment, a $100 minimum credit card payment, and if approved for your mortgage, a $1,900 housing payment.

In this scenario, your DTI is just over 41 percent. That means you’d be eligible for an FHA loan and right on the cusp of qualifying for a VA or USDA loan.

To qualify for a conventional loan, you’d either need to increase your income by $1,000 per month or meet some of those compensating factors.

What sources of income qualify for a mortgage?

You can use many different income sources to qualify for a mortgage, including:

• Employment income: Base pay or wages, bonuses, commissions, overtime payments and self-employment income
• Schedule K-1: Income and distributions from partnerships, S corporations and estates
• Retirement income: Income from retirement accounts — like a 401(k), IRA or 403(b) — and pension income
• Rental income: Including income from accessory dwelling units, or ADUs
• Disability payments
• Social Security payments
• Dividend or interest income
• Alimony and child support
• Trust income

Whichever type of income you have, you’ll need to document it when you apply for a loan. Here’s a list of common documents needed for a mortgage.

How much of your income should go toward mortgage payments?

When you’re determining how much of your income should go toward your housing costs, most financial advisors recommend following the 28/36 rule. This means your monthly mortgage payment and total monthly debt payments — including your mortgage payment — shouldn’t exceed 28 and 36 percent of your total gross income, respectively.

For example, if your gross income is $6,000 per month, your mortgage payment should be no more than $1,680, and your total debt payments, including the mortgage, should max out at $2,160. Use Bankrate’s calculator to see how much house you can afford.

Other factors that impact mortgage qualification

Beyond your income and DTI ratio, lenders also review your:

• Employment record: The requirements vary by lender, but typically, you’ll need to provide evidence of steady employment from the past two years.
• Credit score: For a conventional loan, you’ll need at least a 620 FICO score. If you don’t qualify, you might consider an FHA loan, which allows scores as low as 580. The higher your score, the better the interest rate lenders will offer you.
• Credit history: Lenders are interested in your credit history in addition to your credit score. This helps them determine whether you routinely make late payments or have any foreclosures or bankruptcies on your record.
• Down payment: For a conventional loan, the down payment requirement can be as low as 3 percent. FHA loans require 3.5 percent, while VA and USDA loans typically don’t require a down payment. Like your credit score, the higher your down payment, the more likely the lender will offer you a better rate.
• Cash reserves: This isn’t a firm requirement, but some lenders want to see that you have enough savings and liquid assets to cover mortgage payments for several months.
• Collateral: Collateral is another important factor lenders consider for mortgage qualification. Collateral represents the value of the asset that secures your mortgage loan — in this case, the home you’re purchasing — which lenders use to determine how much they’re willing to lend. If you fail to make mortgage payments as agreed, the lender can initiate foreclosure, which involves taking possession of the home. Your lender generally requires an appraisal to ensure the property is worth the amount you’re borrowing to buy it.

“Speaking from personal experience, I switched jobs two months before applying for a mortgage,” says Andrew Dehan, writer at Bankrate. “One lender required that I submit multiple extra pay stubs. It also pushed my partner to leave me off the mortgage because she had the higher credit score and had been at her job longer. We shopped around and found a lower rate at a bank that didn’t give us nearly as much trouble.”

Low-income loan options for mortgages

There’s no one income required to buy a house, but there are certain programs for lower-income buyers which actually have income qualification limits. For instance, Fannie Mae’s HomeReady program is open only to applicants who make no more than 80 percent of their area’s median income (AMI). That would mean if the median annual income in the community where you live is $80,000, you can make no more than $64,000 to meet the HomeReady income limits.

Consider these ways to buy a house with low income:

• Conventional loan programs: Fannie Mae and Freddie Mac back two conventional mortgages for lower-income borrowers: HomeReady and Home Possible, respectively. The minimum down payment is 3 percent.
• HFA loans: These are loans offered through state housing finance agencies (HFAs). Often they’re geared toward lower- to moderate-income borrowers and have low down payment requirements, competitive interest rates and include closing cost or down payment assistance.
• FHA loans: Insured through the Federal Housing Administration, FHA loans have more lenient credit score and DTI ratio requirements than conventional mortgages. The minimum down payment is 3.5 percent.
• VA and USDA loans: Both of these government-guaranteed loans have no down payment requirement for those who qualify.

In addition to low-income loan options, there are down payment assistance programs specifically designed for lower-income buyers. The majority of these also have income limits, but it’s important to note that these vary widely: What constitutes a low income in San Francisco looks a lot different than it does in San Antonio, for example.

FAQ

• What are some strategies to improve your income for mortgage approval?
  

  Save for getting a better-paying job or taking on a side hustle, it’s not always possible to increase your income. You can still improve your chances of getting approved for a mortgage by lowering your debt-to-income (DTI) ratio, such as by reducing credit card debt. You can then work toward saving for a larger down payment, either by setting aside funds, getting a gift from family or friends, finding a down payment assistance program or a combination. A bigger down payment means you’ll take out a smaller mortgage, making it easier to qualify with your current income.

• How much do you need to make to afford a $500K house?
  

  The answer depends on how large a down payment you can make, your other debts and your likely interest rate.

  If you’re able to put down 10 percent ($50,000), your other debts total $500 each month, and you can qualify for a 6.3 percent interest rate, you’ll need an annual salary of around $120,000 to comfortably afford a $500,000 home.

• What’s the minimum income to qualify for a mortgage?
  

  There’s no specific minimum income to qualify for a mortgage, but if you have a lower income, you may find it difficult in some areas. For example, if you make $4,000 per month and have no other debt, lenders would prefer you spent no more than $1,120 per month on mortgage payments. You could do that by making a 3.5 percent down payment on a $185,000 house — but that might be hard to find in some parts of the country.