How Much Income is Needed to Buy a Home

I get questions often about how we calculate debt to income (DTI) and how much income it actually takes to qualify for a home. So, I wanted to work up a scenario for you. I am making assumptions that the person has good to great but not excellent credit, using averages for things like taxes and insurance, and is putting the minimum amount down. There are times when we can gross up income (disability, child support, etc..) but for this scenario I am just using a basic and bland scenario. This is in no way a guarantee but an idea of what to expect. I always recommend talking to a mortgage professional as each person’s situation is different and unique and there may be guidelines you are not aware of.

Let’s pretend like the applicant has the following debt:

• $500 car payment
• 3 credit cards with $50 minimum payments for $150 total a month
• And $20,000 worth of student loans for $100 a month

Total debt reporting to their credit bureau: $750

• $6200 gross income a month to purchase around $300,000
• $5800 gross income a month to purchase around $265,000
• $5300 gross income a month to purchase around $230,000
• $4800 gross income a month to purchase around $200,000
• $4300 gross income a month to purchase around $170,000

If the person needs down payment assistance you can expect the income needed to increase as most down payment assistance programs have a cap on debt-to-income limits.

Tips to keeping a low DTI or for borrowers with lower income households:

1. Do not over utilize your credit. Make sure your total debt is realistic and feasible for a household with your income. Some of the biggest hurdles I see are high car payments. In the years leading up to purchasing a home, really consider if a new car is worth the reduction in house you may get. For some people who have had their car for at least a few years, refinancing can be a good option to lower their payment prior to applying for a home.
2. Put your student loans on an IBR plan. IBR plans are Income Based Repayment plans. Often, lower income households have $0 that is due to the student loan companies because of IBRs. We often look at this as a win, however, if $0 is reporting to your credit report then we are required to use either 0.5% or 1%. However, if your loans are in repayment for at least $1 or more, then we can use the actual payment- which is often less than our calculations.
3. Use only one credit card. If you must carry a credit card balance, use just one card instead of multiple cards with lower balances. For instance, one applicant might have a total of $3000 in credit card debt spread out between 7 cards. Each card has a minimum payment of $30 a month for a total of $210. Where when charged to only one card, the minimum might only be $75-$100.
4. Consider if some of your installment loans can be paid down to qualify. Installment loans with less than 10 months remaining on them can sometimes be excluded from your debt to income. There are conditions that apply so speak to your mortgage professional.
5. Consider purchasing a duplex and living in one side while renting the other. The potential rent income can off set the payment you are qualifying for.
6. Consider cosigners or coborrowers to help you qualify.

Finally, I get asked about how second jobs would affect the qualifying DTI. Keep in mind, all programs require at least one year of both jobs simultaneously but other programs require two years in order for the income to be qualified income.

As always, this is just one scenario. There are various things that will help applicants qualify and you should always apply if interested in owning a home! If you are not quite where you need to be, The French Team can offer advice and a plan to get you there.