Home Loans are made against your ability to repay. While the mortgage loan is secured against the house, it is really made against your income. That’s what mortgage lenders are look for, income to offset liabilities. Yes, a house payment is liability for a borrower. Oftentimes, there is a disparity between how much house you “want” and how much house you “can” purchase given your gross monthly income, payment comfort level, consumer debt obligations and amount you are looking to borrow.
How much income you need to purchase a house will vary by your payment comfort level including any consumer and or other monthly debt obligations you might have.
Some Important Terms To Understand:
Mortgage Payment: principal, interest, property taxes insurance and mortgage insurance if needed
Consumer debts: minimum payment obligations on things such as auto loans, credit cards, student loans, personal loans, installment loans
Other debt obligations: alimony and/or child support or any other court ordered repayment obligation
Here’s simple mathematical formula:
(Target Mortgage payment + consumer debts) ÷ .45 = Gross Monthly Income needed to qualify
Running the math….
If your target mortgage payment is $2000 per month and you have consumer debts of $300 per month, you will need $5111 gross monthly income to offset your housing expense and consumer obligations.
How Much Loan Amount For How Much Payment
*Loan Qualifying Tips
- For every $100 in mortgage payment you need approximately $225 in income
- For every $100,000 financed expect a mortgage payment of approximately $725 per month
Based on these tips (assuming no consumer debt):
One could estimate in order to borrow $300,000 expect a mortgage payment of $2175 per month. To increase the mortgage payment (raising purchasing power) by $100, you’ll need an extra $225 in monthly income.
That is only half of the equation…
Down Payment becomes another important factor in determining how much income is needed to buy a home.
There are various programs with varying down payment requirements. Consider the following possibilities using a purchase price of $300,000 (assuming no other debts)
Conventional Loan 5% down/$15,000– approximate mortgage payment$1863 per month
→Gross Monthly Income Needed: $4140
Government FHA Loan3.5% down/$10,500– approximate mortgage payment of $2007
→Gross Monthly Income Needed: $4460
Government USDA Loan 0% Down/no down payment required-approximate mortgage payment of$1833
→Gross MonthlyIncome Needed: $4073
So at the end of the day how much income you need to purchase a home is predicated on your monthly income, consumer debt obligations and down payment.
*For every dollar of debt, you will need double that in income.
Here’s an example:
$300 car payment needs at least $600 per month or more in income to offset the car payment
*Debt erodes income, less income translates to less purchasing power
Does buying a home make sense?
Yes, so long as the amount you can borrow for your desired purchase price is in sync with your debt obligations and of course your down payment. Discover how much you can borrow today by getting a complementary pre-qualification online. See how much income you need to buy a home now!
RELATED MORTGAGE ADVICE FROM SCOTT SHELDON
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