How much do you need to earn to buy a house in 2024? The answer will largely depend on the average home price in your area. However, the formula used by lenders to determine loan eligibility is pretty universal. Here’s how to discover the salary you need to jump into home ownership.
We’ve applied the following 5 principles in depth specifically on how much you need to make to afford a $300k home or a $500k home.
#1 Debt to income (DTI)
This is a big one for lenders. While having a large income helps, lenders can’t approve you for a mortgage if most of your monthly income goes toward debt. That’s why they look at something called the debt to income ratio (DTI) to see where you stand.Â
A higher debt to income ratio will require higher income.
- DTI is calculated by dividing your monthly debt payments by your monthly income. Lenders want to see a DTI of 35% or less.
- Some lenders will approve borrowers with DTIs up to 45% as long as everything else is strong.
- With FHA mortgages, DTI can be as high as 50%.
Let’s say you make $4,000 per month. However, you’re paying $200 in credit card payments, $1,000 in rent, and $150 in student loans. This brings your DTI right under the line to 33.75%. There’s a good chance you’d get approved for financing with a conventional mortgage if you have strong credit or a decent down payment.
- Your lender will also factor your new mortgage payment in the place of rent when determining DTI. Generally, lenders won’t allow you to buy a home that will cause housing to cost more than 28% of your monthly income.
- If your DTI is too high, it’s time to consider either cutting debts wherever possible or focusing on boosting income.
#2 Down payment
The amount you put down plays a big role in whether you’re likely to be approved for a mortgage. That’s because your down payment makes your mortgage smaller in proportion to a home’s purchase price and displays financial stability.Â
A smaller down payment will require higher income.
- A down payment is a percentage of the loan total.
- The standard down payment on a conventional mortgage is 20%.
- However, you can put down as little as 3-5% on a conventional mortgage if you’re willing to pay private mortgage insurance (PMI).
- If you’re getting an FHA loan, you may be able to put down between 3.5% and 10% based on your credit score.
- People who qualify for VA or USDA loans can put down 0%.
A larger down payment generally means lower monthly payments over the life of the loan. A mortgage calculator can help you determine how different down payment sizes impact your monthly total.
For example, putting 20% ($60,000) down on a $300,000 house brings your monthly payment to $1,717 with a 6.2% interest rate. If you put down just 10% with the same property taxes and insurance premiums in the mix, your monthly payment would be $2,000.
#3 Interest Rate
As many buyers learned after 2020, your interest rate can affect home affordability. A few different factors determine your interest rate.Â
Higher interest rates will require higher income.
However, individual borrowers are offered different rates based on:
- Credit score: Lenders generally give better interest rates to low-risk borrowers with credit scores above 720.
- Down payment: With a larger down payment offsetting risks for lenders, most offer better interest rates to borrowers who put down 20% or more.
- Loan term: While the 30-year loan is standard, interest rates are often lower with shorter mortgage loan terms.
#4 Type of income
Lenders don’t just look at how much you’re bringing in. They’re also looking at how you’re categorized as a worker. From a paperwork perspective, that means how you file your taxes.
Remember that a lender’s goal when approving home loans is to avoid risk. They approve borrowers who have the best chances of repaying loans in full. It’s easier to provide confirmation of income if you are a W-2 employee. During the mortgage pre-approval process, lenders will ask you to submit tax returns going back two years or more.
Non-W2 employees may need higher income and a longer history of income to qualify.
If you are a self-employed or 1099 employee, you can still get approved for a mortgage. You’ll just need to spend more time providing proof of stable income. For 1099 employees, lenders generally want to see at least a year of stable income and documentation of year-to-date income. You may also be required to have a higher credit score to offset risk. For self-employed borrowers, you’ll need to provide at least two to three years of tax returns verifying business income.
All of your income counts when being approved for a mortgage. That includes:
- Overtime pay
- Tips
- Commissions
- Bonuses
#5 Non-employment sources of income
Money from investments, Social Security payments, and military allowances can also be factored into your income when applying for a mortgage. If you receive child support or alimony payments, these totals can also usually count toward your income to help you qualify for a mortgage.
Alternative income sources may be counted as income.
You might also use gift funds for your down payment, depending on loan type. This can boost home affordability by shrinking your monthly payments. Just make sure you’re following your lender’s rules for who can give you down payment funds.
