There are many questions you may have when looking into home ownership, but one of the first is probably, “What should my income be to buy a home?”
You want to be sure you can actually afford the monthly mortgage payments without stretching your budget too thin. After all, you’ll have other expenses and things you want to do with your money … it can’t ALL go into your new home.
The thing is, there’s no minimum income required to buy a home.
What IS required is a mortgage lender approving you for the loan. And one of the criteria for that mortgage loan approval is your debt-to-income ratio.
Debt-to-Income Ratio
When reviewing your mortgage loan application, a lender will ask how much income you make and how much debt you have. This determines your debt-to-income ratio.
The Consumer Financial Protection Bureau defines it this way:
“Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.”
For example, if you have an annual income of $60,000 ($5,000/month), and you have recurring monthly debt payments of $1,000/month, then you have a debt-to-income ratio of 20% ($1,000/$5,000) before adding a mortgage payment.
Generally, the highest debt-to-income ratio you can have and still get approved for a Qualified Mortgage is 43%. Higher than that and you’ll likely have trouble paying back the loan … and lenders want to get paid back.
So, if you have a monthly income of $5,000, you will need your monthly debt payments — including your monthly mortgage payment — to be no more than $2,150 (43% of $5,000). If you had $1,000 of other debt payments, that means you can afford a $1,150 monthly mortgage payment.
How Much Home Can You Afford?
Knowing your debt-to-income ratio helps you know how much home you can afford.
Remember, there’s no minimum income requirement. But your income DOES affect the kind of home you’ll qualify for.
The larger your income, the larger the home. But you can also qualify for a larger home if you have a smaller amount of debt.
Most financial advisers recommend that your mortgage payment should be no more than 28% of your monthly income. That would be $1,400 with an income of $5,000/month.
It’s a good idea to talk to a mortgage loan officer and find out how much of a loan you qualify for … even before you start looking at real estate.
Determining a home price range that matches your income speeds up the process and helps you find a home you can afford.
Looking to Buy a Home in Fresno?
If you’re looking to buy a home in Fresno, we’re here to help!
Send us a message or call us at 559-490-0207 today to start the conversation.