Homeownership is not just for the ultra wealthy. While income is an important factor when buying a house, knowing exactly how much you need to earn is not as simple.
Most people who buy a home use a mortgage loan to finance the majority of the purchase price. Lenders consider an applicant’s debt-to-income (DTI) ratio when deciding how much they are willing to loan for the purchase of a home. If you have higher debt, such as from student loans, car loans, or credit card debt, you will need to have a higher income to show that you are able to comfortably pay all of your bills. The lender compares these two amounts to make sure that you can handle adding the monthly mortgage payment.
If you aren’t sure about what to expect, talk to your lender about get preapproved or prequalified. They will ask about your basic financial situation to give you a ballpark of what you can borrow. Keep in mind that this amount is not definite and that it may go up or down as they review your application more thoroughly in underwriting.
How Do Lenders Determine My Income?
For those traditionally employed, you will need to provide your pay stubs or W-2s to show your most recent earnings. Contract employees can provide a 1099 form to show the same information. If you are self-employed, your previous few years’ tax returns will be needed to show a strong history of income. In general, self-employed and contract workers need to show a longer history of earnings because their income can fluctuate more. You can also provide documentation of income earned through commissions, bonuses and overtime, military benefits, alimony and other court-ordered payments, investments and retirement accounts, and social security.
What Else Does a Lender Consider?
Income and DTI are not the only things that a lender wants to know when considering your mortgage application. They also look at your credit score, the purchase price of the home, and the percentage that you plan to put down as a down payment.
If your income is lower than ideal for your home purchase but you have little debt and an excellent credit score, your lender might still be comfortable approving your loan. Be prepared to provide documentation of every recurring expense that may impact your ability to pay back the loan. There is no set amount of income that you need before you can purchase a home, but it is always a good idea to get your debt as low as possible before beginning your application. Let’s talk about your individual situation and what steps you can take to become a homeowner.
Mark Avila | Loan Officer