How Much Income Do You Need To Buy a House?

Calculate how much income you need per month for a home purchase

Table of Contents
Table of Contents

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. Instead, you can use a simple formula and run the numbers yourself.

Learn more about the current housing market, median home prices, and how much income you need to buy a house.

Key Takeaways

• House prices are up as a result of a record-setting housing boom.
• The amount of house you can buy depends on your housing-expense-to-income ratio, down payment, interest rate, and other factors.
• Figure out how much income you need by dividing your estimated monthly payment amount by the maximum housing-expense-to-income ratio allowed on your loan.

The Housing Market Right Now

The COVID-19 pandemic and accompanying low interest rates have fueled a housing boom. Consider that the average mortgage payment increased by more than 16% between March and April of 2021. Further, the home price index increased over 14% year-over-year (the highest value ever recorded in the series).

So how much are homes going for? The median sale price in Q2 of 2021 was \$374,900, up from \$322,600 a year prior, according to the Federal Reserve. However, where you buy matters. For example, in Kennebec County, Maine, the median list price is \$225,000, up from \$190,000 last year, according to realtor.com. In Fresno County, California, the median home price (sold) is up to \$393,000 from \$291,000 the year prior. In expensive markets such as Seattle, median home listing prices are at \$780,000, up from \$690,000. If one market is getting too pricey, it may be time to look into moving elsewhere.

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. For example, if your gross monthly income is \$5,000 and you owe \$2,000 to monthly debt expenses, your debt-to-income ratio would be calculated as follows:

\$2,000 (monthly debt) / \$5,000 (gross monthly income) = 40% (DTI)

Monthly debt expenses often 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. When you’re looking into buying a house, lenders will calculate your DTI to determine how much house you can comfortably afford.

However, they won’t just look at your overall DTI. Lenders also look at your ratio of housing-related debt to gross income. For example, if you pay \$1,650 per month for all of your housing-related expenses (mortgage, property taxes, homeowners insurance, etc.) and your gross monthly income is \$5,000, your housing-related debt-to-income ratio would be:

\$1,650 (monthly housing expenses) / \$5,000 (gross monthly income) = 33% (housing DTI)

So what is considered an acceptable DTI ratio? FHA-backed loans currently require your total housing debt to be 31% or less of your gross income. Additionally, your total debt can’t exceed 43% of your total gross income. In comparison, Fannie Mae, a government-sponsored-enterprise (GSE) that finances approximately 25% of single-family homes in the U.S., 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).

How Much Income Do You Need To Buy a House?

If you’re buying a home priced at the current median in the U.S. (\$374,900), the amount of income you would need depends on your loan program, loan term, interest rate, and down payment. Using our mortgage calculator to figure out the estimated monthly payments, here are a few examples:

If you decide to go with an FHA loan, put 3.5% down, sign a 30-year term, and get a 3.5% APR, your estimated monthly payment would be \$2,461. That includes principal, interest, property taxes, homeowners insurance, and private mortgage insurance (PMI). Because the FHA only allows your housing debt to account for 31% of your income, your pretax income must be at least \$7,940 per month and \$95,283 per year to buy a \$374,900 house.

On the other hand, if you go with a conventional loan financed by Freddie Mac, put 3% down, sign a 30-year term, and get a 3.5% APR, your housing expense ratio might be capped at 28%. That means 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.

What About a Down Payment?

The amount you’ll need for a down payment depends on the loan program you choose and if you meet the eligibility requirements. For example, the FHA program requires you to put down at least 3.5%. However, if your credit score is between 500 and 579, you’ll need to put down 10%. For conventional loans, you’ll need to put down at least 20% to avoid paying PMI.

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.

Is there an equation to help determine if my income is enough?

To figure out how much income you need to buy a house, you’ll first need to calculate your estimated monthly payment. You can use our mortgage calculator to help with that.

From there, divide your monthly payment by the maximum allowed housing-expense-to-income ratio. For FHA loans, it is 31% and for conventional loans, it is often 28%. This will give you the minimum amount of pre-tax income you need per month to qualify. You’ll also need to ensure that your total DTI fits the requirements.

Formula to determine the minimum required income for a home:

Monthly payment amount / Maximum housing DTI ratio = Minimum required income per month

How can I use DTI?

Your debt-to-income ratio is a numerical expression that shows the percentage of your income that is consumed by debt payments. It can help you to understand how much extra money you have for other expenses. When on the market for a home, you can calculate your DTI to find out how much house you can finance.

My income changed radically. How can I calculate this change?

If your income has changed, the maximum mortgage payment you qualify for will change, too. 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.

For example, say you make \$5,500 per month and want an FHA loan with a 31% maximum housing DTI ratio.

\$5,500 * 31% = \$1,705 maximum monthly housing debt expenses

The maximum amount your monthly housing expenses can be (including principal, interest, PMI, and property taxes) is \$1,705.