Income Requirements to Qualify for a Mortgage

Key Points

• There are no specific income requirements to qualify for a mortgage.

• To determine if you qualify for a loan, lenders use your debt-to-income (DTI) ratio to compare your Income to your total mortgage debt.

• Your credit score and down payment amount also greatly influence whether you qualify for a loan and the interest rate you receive.

From conventional to government loans, many types of mortgages are suitable for borrowers with different credit scores and financial means. While there is no standard basic income to qualify for a mortgage, you must earn enough to make reasonable loan payments. Here's how to qualify for a mortgage and how your Income can affect the decision.

Are there income requirements for a mortgage?

There is no single, universal income requirement to qualify for a mortgage. It all depends on the amount you need to borrow, the current interest rate, and the type of loan you are applying for.

Instead of requiring a certain amount of Income, mortgage lenders evaluate your credit and financial information for two key points:

How many mortgages are you eligible for?

Given your debts and Income, can you afford the monthly mortgage payments?

Lenders look at your debt-to-income (DTI) ratio to determine the answers to these questions.

Debt-to-Income ratio requirements

Your DTI ratio, or "back-end" ratio, measures gross monthly Income compared to monthly debt payments. To calculate your DTI ratio, divide your monthly loan payments by your gross monthly Income.

While there is no minimum income requirement for a mortgage, there are parameters around the DTI ratio. These vary depending on the type of loan:

• Conforming Loan: 36% or less, but can be as high as 43% with "compensating factors," such as a high down payment, high credit score, or sufficient deposits.

• Jumbo Loan: 43% or less

• FHA loans: 43% or less

• VA and USDA loans: 41% or less

What sources of income qualify you for a mortgage?

You can use many different sources of Income to qualify for a mortgage, including:

• Labor Income: Salary or basic salary, bonus, commission, overtime pay and self-employment income

• Schedule K-1: Income and Distributions from Partnerships, S Corporations, and Estates

• Retirement Income: Income from retirement accounts (such as 401(k), IRA, 403(b), etc.) and pension income.

• Rental Income (including accessory dwelling units or ADUs)

• Disability Payments

• Social Security Payments

• Profit or interest income

• Alimony and child support

• Trust the Income.

Regardless of your Income, you must provide your lender with documentation to support your claims. Here is a list of standard documents required for a mortgage.

Other Factors That Affect Mortgage Eligibility

In addition to your Income and DTI, lenders also look at your:

• Employment History: Many lenders want to see that you have had steady employment and Income before applying. Requirements vary by lender. Speaking from personal experience, I had trouble applying for a mortgage because I changed jobs two months before using it.

• Credit score: You'll need a FICO score of at least 620 for a conventional loan. If you don't qualify, you can consider an FHA loan, which allows a score as low as 580. The higher your score, the better interest rate lenders will offer you.

• Down Payment: For a conventional loan, the down payment requirement can be as low as 3%. FHA loans require 3.5%, and VA and USDA loans require no down payment. Like your credit score, the higher your down payment, the more likely a lender will offer you a better rate.

Home Loan Options for Low-Income People

Low Income doesn't have to stop you from buying a home. Here are some ways to get help purchasing a low-income home:

• Mortgage Assistance Programs: Fannie Mae and Freddie Mac offer traditional mortgages with low down payments and homeownership education.

• HFA Loans: These are loans offered by state housing finance agencies. They come with low down payment requirements and competitive interest rates and often come with closing costs and down payment assistance.

• FHA Loans: Insured by the Federal Housing Administration, FHA loans have more lenient credit scores and DTI index requirements than conventional mortgages.

• VA and USDA Loans: Government-guaranteed loans require no down payment for qualified individuals.

Income and Mortgage Eligibility Frequently Asked Questions

How much of your Income should go toward mortgage payments?

Financial advisors generally recommend following the 28/36% rule. This means your monthly mortgage payment and total monthly debt should be at most 28% and 36% of your total gross Income, respectively. For example, if you have a gross income of $6,000 per month, your mortgage payment should be at most $1,680 (28% of $6,000), and your total debt payment (including the mortgage) should be at most $2,160. (36 percent of $6,000) should be. Check out Bankrate's calculator to see how much home you can afford.

What are some strategies to improve your Income for mortgage approval?

If you can get a raise, it's a significant first step toward improving your Income and qualifying for a mortgage. Otherwise, be sure to include all reliable sources of Income when applying for a mortgage to ensure your Income is accurately reflected. Commonly overlooked sources of Income include alimony, child support, interest or profits from investments, and Income from rental properties. Social Security, retirement, and pension income should be considered Income from a side business or part-time job you've earned in the past two years. Another strategy is to offer a higher payment to lower the loan amount and increase your chances of approval.

Are there income limits for a mortgage loan?

While there are no minimum income requirements for mortgage loans, income limits may apply for some loans. These include Fannie Mae HomeReady loans, Freddie Mac Home Possible loans, and government-backed USDA loans.

The Bottom Line

Since there are no specific income requirements for a mortgage, you don't need to earn much money to buy a home. It's about making monthly payments based on your loan's size and interest rate and how much other debt you have. Your DTI index will largely determine this. Other factors, such as your credit score and your down payment, will affect your score and the interest rate you receive.