Do you know how much income is required to buy a home? If not, this calculator will illustrate the earnings needed to qualify for a certain mortgage amount. You can see what it takes to get your dream home, or the perfect house for your situation.
Understanding your income is important so you can plan ahead for your mortgage and work with an actual number. Below, we've prepared the ultimate Q&A on mortgage income requirements with special tips for self employed applicants.
Qualifying for a mortgage can be tricky, especially when you have multiple bills and loans to pay. By analyzing your liabilities, this calculator will model the income you may need to qualify.
Lenders will want to see what your other expenses are, not just the total amount of money you bring in, in a given month. If you won't have enough left over to pay a mortgage, you won't qualify.
By doing the math for you, this calculator will make the process less daunting. When you want to buy a house, you should be able to focus on finding the perfect home, not stressing over calculations.
Additionally, this calculator can help you figure out what you might need to change if you don't qualify to buy the home you want right away.
To get started, you'll plug in numbers like the mortgage amount you need, which is the home's pruchase price minus your down payment.
You'll also have to add specific loan information like the term and interest rate. It helps to have done some research on the type of home you'd like and the financing you need.
Finally you'll have to include some information about your total debts and monthly housing expenses.
This includes a rough figure of your property taxes, home insurance and more.
Then, the calculator gives you an estimate of how much salary or wages it will take to qualify and what your monthly payment will look like.
Before you start calculating whether or not you'll qualify for a mortgage, it's a good idea to work out your annual income. This will give you a more accurate idea of what you're working with.
The word "income" can mean more than one thing. There's a total amount you make every year, called your annual income.
To calculate your annual income, you'll need to know what you make in a year. If saving pay stubs for a whole year is too hard, just calculate your wages or salary before tax for one month. Then multiply it by 12 to get an approximate yearly amount.
If you want to know how much money you have after all your liabilities are subtracted, that's your "net" annual income. This figure can help you set cap on your housing expenses.
To figure this out, calculate all your monthly bills or expenses that you need to pay. For example, you might total up your car payment, loan payment, and credit card payment for a given month.
Then multiply by 12 and subtract this total from your gross income.
Now you'll have the net income that you have to work with leftover.
Lenders have income requirements to ensure that borrowers can make their payments. It's also important to know what you can really afford. You don't want to agree to a loan just because you can get it - you need to get a loan that you'll be able to pay back with ease.
Even if your income is low, you might still qualify for a smaller home and mortgage. It helps to have minimal debt and a good credit history to build towards your dream home.
When assessing a mortgage application, lenders typically use the debt-to-income ratio to evaluate a borrowers available income.
Your lender will compare your gross income to your liabilities, called a debt-to-income (DTI) ratio, to qualify your loan request.
Mortgage lenders typically expect you to spend 28 percent of your gross income on housing each year, and they'll want to see no more than eight percent of that gross income spent on other total debts.
This gives a total of 36 percent of your yearly income to be spent on debts (including your mortgage payment). This is called the 28/36 rule of thumb for most banks.
Your other debt is anything that you make a monthly payment on, including student loans and car payments.
The person that is assessing your file (called an underwriter) will sometimes give exceptions, and may overlook any debts with a term that has 6-10 months or less remaining (excluding revolving liabilities i.e., credit cards).
The debt-to-income ratio can change depending on the type of mortgage. In some cases, mortgage lenders may extend the DTI ratio up for 50% when you meet certain qualifying criteria.
If you get a loan backed by the Federal Housing Administration or Rural Housing Service (USDA), your housing expenses can be up to 29 percent of your total income. You can also have up to 12 percent of your income taken by other debt, for a total of 41 percent.
Meanwhile, the Veterans Benefits Administration offers a total of 41 percent of debt total without any rules for how much is devoted to housing or other expenses.
If you're self-employed, you may be wondering if a mortgage is in store for you. When you can't show conventional income in the form of a steady paycheck, will banks approve you for a mortgage?
The answer is yes! However, you might need to have a higher down payment available, and it's essential to have all of your documentation well-organized for the application process.
Just as with any other mortgage, lenders require specific documentation from self-employed people that apply for a loan.
You'll need to list your debts, assets and federal tax returns.
For someone that's self-employed, as of 2019, you're likely to be expected to show one or two year's worth of financials (ie. tax returns and profit and loss statements).
One year if your business is in the same field that you previously were employed in or two years if your previous employment is unrelated.
A mortgage applicant that was previously employed as a mechanic with BMW decided to start his own auto repair company. Within his first year of operations, he earned a similar amount of income as he did working for BMW.
In this case, the applicant shows enough stability to provide one year of income statements.
If however, he decided to open up a hair salon, he would need two years of business financials regardless of how profitable the business was in its first year.
You can also expect lenders to inquire about other business-related factors when approving a self-employed applicant. This extends to the nature of the business, the demand for its products, and a future projection of your operations.
Most applications are initially processed through an automated underwriting service provided by Fannie Mae or Freddie Mac.
While they are both fairly similar, Freddie Mac's Loan Prospector only requires one year of financials, while Fannie Mae's Desktop Underwriter requires two years. As such, you can ask your lender to utilize the software that is more suitable to your situation.
Don't forget that lenders will be considering your total income before taxes, not after. Banks typically gross up 25% of the net income for self-employed applicants to account for taxes.
In certain cases, underwriters can use an alternative method to determine "qualifying" income for business owners. They'll take your taxable income and add back deductions for things that are not cutting into your revenue that year, like for example depreciation. Conversely, they also may exclude any income that is not consistent or ongoing.
Going back to the previous example, let's say the mechanic sells one car at his shop and uses the profits to show higher earnings in his second year of operations. It's likely that the lender will deem the sale to be a rare occurrence and exclude the sale from the applicant's net income.
Most lenders just want to see someone with predictable, stable income. If you can prove that you have that, getting a mortgage will be no harder than if you had a W-2.