Are you shopping for a house but wondering what your price range should be? You don't have to go to a lender and check your credit to get a ballpark idea. You can use a simple formula and run the numbers yourself.
Learn more about how to figure out how much income you'll need to buy a house.
- House prices are up in 2022 as a result of a record-setting housing boom.
- The amount of house you can buy depends on your housing-expense-to-income ratio, your down payment, the interest rate, and other factors.
- Figure out how much income you'll need by dividing your estimated monthly payment amount by the maximum housing-expense-to-income ratio allowed on your loan.
Understanding Debt-to-Income Ratios
Your debt-to-income (DTI) ratio is the amount of debt you have in relation to the amount of money you earn. It would be calculated as follows if your gross monthly income is $5,000 and you owe $2,000 a month to debt expenses:
$2,000 (monthly debt) / $5,000 (gross monthly income) = 40% (DTI)
Monthly debt expenses include payments toward your mortgage, car loans, personal loans, and credit cards.
Mortgage loan studies have shown that borrowers with higher DTIs tend to have more trouble making their mortgage payments. Lenders will therefore calculate your DTI to determine how much house you can comfortably afford when you're looking into buying a house.
But they won't look at just your overall DTI. Lenders also look at your ratio of housing-related debt to your gross income. Your housing-related debt-to-income ratio would look like this if you pay $1,650 per month for all your housing-related expenses and your gross monthly income is $5,000:
$1,650 (monthly housing expenses) / $5,000 (gross monthly income) = 33% (housing DTI)
DTI Requirements for Mortgages
The amount of income you'll need depends on your loan program, loan term, interest rate, and down payment.
- FHA-backed loans require that your total housing debt must be 31% or less of your gross income. Your total debt can't exceed 43% of your total gross income.
- Fannie Mae, a government-sponsored enterprise (GSE), has a maximum total DTI ratio of 36%. Fannie Mae will allow total DTIs up to 45% if a borrower meets certain other credit score and reserve requirements.
- Freddie Mac, another GSE that finances home loans, has a maximum housing expense ratio of 28% and a maximum DTI of 36%, up to 45% if the borrower meets credit score and other requirements.
|FHA Loan||Freddie Mac
|Term||30 years||30 years|
|APR||3.5% APR||3.5% APR|
|Maximum Housing DTI||31%||28%|
|Minimum Income Required (per month)||$7,940||$8,825|
|Minimum Income Required (per year)||$95,283||$105,900|
Using our mortgage calculator to figure out the estimated monthly payments, here are a few examples if you're buying a home priced at $374,900.
Your estimated monthly payment would be $2,461 if you decide to go with an FHA loan, put 3.5% down, sign a 30-year term, and get a 3.5% APR. That includes principal, interest, property taxes, homeowner's insurance, and private mortgage insurance (PMI). The FHA only allows your housing debt to account for 31% of your income, so your pretax income would have to be at least $7,940 per month and $95,283 per year to buy a $374,900 house.
Your housing expense ratio might be capped at 28% if you go with a conventional loan financed by Freddie Mac, if you put 3% down, sign a 30-year term, and get a 3.5% APR. You would need a pretax income of $8,825 per month and $105,900 per year to buy the same $374,900 house. The tougher DTI requirements result in a higher income requirement.
Do you have your dream house in mind? Calculate your monthly payment with our mortgage calculator. Check the mortgage rules of your loan program for the maximum housing-expense-to-income ratio. Lastly, divide your monthly payment by the housing-expense-to-income ratio to get the minimum income required per month.
The Effect of Your Down Payment
The amount of your down payment will affect how much pre-tax income you'll need because it will either increase or decrease the amount you're borrowing.
The FHA program requires that you put down at least 3.5%, but you'll have to put down 10% if your credit score is between 500 and 579. You'll have to put down at least 20% to avoid paying PMI on a conventional loan.
Here's a look at what you can expect to put down on a $374,900 home with each of the down payment options:
- FHA 3.5% down payment: $13,122
- FHA 10% down payment: $37,490
- Conventional 20% down payment: $74,980
You can figure out your minimum down payment amount by multiplying your loan program's down payment requirement by a house's sale price.
Frequently Asked Questions (FAQs)
Is there an equation to help determine if my income is enough?
First, calculate your estimated monthly payment. Use our mortgage calculator to help with that. From there, divide your monthly payment by the maximum allowed housing-expense-to-income ratio for your loan type. The formula to determine the minimum required income for a home would look like this:
Monthly payment amount / Maximum housing DTI ratio = Minimum required income per month
My income changed radically. How can I calculate this change?
The maximum mortgage payment you qualify for will change if your income changes. You can figure out your maximum monthly payment by adding up your gross monthly income and multiplying it by the maximum housing DTI of the loan program you're interested in. The result will be the maximum mortgage payment you can get.
Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?"
U.S. Department of Housing and Urban Development. "HUD 4155.1: Section F. Borrower Qualifying Ratios," Page 4.
Fannie Mae. "Eligibility Matrix," Pages 4-5.
FDIC. "203(b) Mortgage Insurance Program," Pages 1-2.
Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?"