If you’re thinking about purchasing a house, it’s not just your credit score and your down payment that counts, it’s also your income, as your income drives affordability. How much income you generate is going to determine whether you’re able to buy a home. Here are some things to know about income when buying a home…
Your income is the driver of everything. Before we can talk about how income affects your homebuying chances, let’s look at the various forms of income.
Social Security, pension income, and or disability income are all counted the same and this income can be counted for use when getting a home loan to buy a home.
Self-employment income can also be counted for use for income when buying a home as well as long as it’s enough income.
Income going to be derived from bank statements when you’re self-employed is acceptable with not all but many mortgage companies.
Of course, the main one is a W-2 job this income could be counted as long as it’s enough income. A second job cannot be counted unless you’ve had a two-year history of maintaining two jobs.
Rental income for a rental property already owned or if the new property you’re buying is a multi-family or if you’re buying a new property as a rental, all of which can be counted towards your ability for getting a mortgage to buy a home.
Your income affects your borrowing power from a ratio of 2:1. In other words, it takes two dollars of income to offset every dollar of debt simply put let’s say your mortgage payment is $4000 a month it would take double that, $8000 of income needed to upset the debt assuming you don’t have any other monthly obligations. So if you’re looking at a $4000 a month mortgage payment and you have $8000 a month of income and you have a good credit score, you’re in business.
This should work granted this is a little bit high representing half of your monthly income and just because the mortgage company says that you can do this using 50% of your income for a house payment doesn’t necessarily mean you should How your income is calculated matters, maybe the mortgage company is not using all of your true income, or their averaging your income, all of which you could make a justification for saying “I’m OK with a 50% debt income ratio” knowing that I really do have more income, and the lender is taking a conservative approach to my situation.
That’s a pretty common scenario. Additionally, it’s reasonable to expect if you’re earning more income, you’re borrowing power can go up on a home whether you’re using a down payment assistance program or whether you’re putting in more cash.
The reality of it is your borrowing power is greater with more income provided the income is not handcuffed by monthly debt, such as car loans, student loans, and credit cards. Your purchasing power will still go up even if you have these things with more income. For example, let’s go back to a $4000 a month mortgage payment scenario let’s say that you have another $500 a month of payments including a student loan and a car loan for example. That means your monthly expenses are 4500 a month which means you’ll need $9000 of income to offset it. Well if you had anything more than $9000 a month more of income, you’re borrowing power just went up. Not all but in most situations $500 a month of income translates to about $250 a month more of the mortgage payment, $250 a month more of a mortgage payment on average is about $50,000 of purchasing power. You heard that right $500 a month more of income would afford you the ability to be able to buy a $650,000 home versus a $600,000 home as an example.
Additionally, you can double the math so $1000 a month more income would afford you the ability to take on $500 a month more of the mortgage payment, $500 a month more of the mortgage payment on average is about $100,000 of purchasing power.
So you can see by the math, more income helps your borrowing power. In terms of keeping this simple and pragmatically planning for the future think in increments of $500 per month. For every $500 a month, it’s $50,000 more of purchasing power. So you want to be focusing on how much more in gross income per month can I earn, and if I can earn that level of income, how much more in purchasing power am I going to have to buy the home I want? That’s the main question you should be asking yourself and a good mortgage company that understands the intricacies of payment to income and how that directly affects your bottom line is a wonderful place to start so you can formulate a long-term plan for your family. Interest rates are not super attractive right now however, getting an affordable payment within your means should be the primary objective regardless of your income or whether you buy today or whether you wait for the future.
Looking to get a better sense of how your income can help you buy a home? Get a no-cost quote today!
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