• How Much Income Do I Need to Qualify for a Mortgage Loan?

    Brandon Cornett

    By Brandon Cornett
    © 2011 All rights reserved

    Reader Question: "I started a new job in the spring, and my income went down a bit from my last place of employment. I was wondering how much income I would need to get approved for a mortgage loan in the current economy. Is there a magic number lenders use? Or does it just depend on the mortgage company I use?"

    Short Answer: To qualify you for a home loan, lenders will look at your income level in relation to the amount of debt you have. This is aptly referred to as your debt-to-income ratio, or DTI. There are two different ratios, actually. One looks at your housing-related costs only, and the other includes other types of debt as well (such as credit cards and auto loans).

    Most lenders prefer to see a combined or "back-end" ratio below 41 percent. This means your total debts, including your mortgage payment, should not use up more than 41 percent of your income.

    That's the gist of it. Now let's examine this question in more detail: How much income is do I need to qualify for a mortgage loan?

    The Rules Vary, But Not by Much

    Let me begin by saying all of this varies from one lender to the next. For example, if I approach a handful of lenders about a certain home loan, and my income level is on the qualification "border" of acceptability, one company might approve me for the mortgage while others turn me down. That's because they have their own comfort zones, as far as the income needed to qualify for a loan.

    With that being said, there are some general rules used by most lenders most of the time. And those are the rules we will talk about in this article. I've already mentioned one of them in the introduction to this article -- the 41-percent DTI ratio.

    Also keep in mind that your income is only one piece of qualification puzzle. Lenders will review other things, such as your credit score and your total amount of debt. You'll also need to make a down payment of some kind, unless you use a VA or USDA home loan.

    Let's get into the nuts and bolts, shall we? Here are some specific examples that show how much income you might need to qualify for a mortgage, in the current lending environment.

    How Much Income to Qualify

    Earlier, I mentioned the two types of debt ratios used by mortgage lenders. One of them looks at your housing costs alone, and the other considers other types of debt as well. Here's how they work:

    • Your front-end debt ratio only includes your mortgage payment, property taxes, and homeowners insurance. In other words, it compares your housing-related expenses to your income. Most mortgage lenders want to see a front ratio below 29 percent. So you would need enough income to keep your monthly housing costs below 30 percent. If your monthly mortgage payment (including taxes and insurance) exceeded 29 percent of your income, you might have trouble qualifying for the loan.
    • Your back-end debt ratio is a comparison between your total debt load and your income. It includes your mortgage payment plus any other obligations you have -- credit cards, auto loans, student loans, etc. Most lenders will want you to keep your back-end ratio at 41 percent or below. So you would need enough income to keep your combined debts below the 42-percent mark. If these debts exceed 41 percent of your income, you might not qualify for the loan.

    In your question, you asked if there was a "magic number" relating to the amount of income you need to get a mortgage loan. This is about the closest thing to it. Again, these two ratios are not set in stone. Some lenders will allow you to exceed these limits if you have excellent credit and a substantial down payment. But it's a good rule of thumb to go by.

    Debt Divided by Income = DTI Ratio

    The math here is pretty straightforward. You can get a rough idea of your DTI ratio by dividing your debt by your income. Here's an example of how I would calculate my back-end ratio (the one that includes housing costs and other types of debt):

    • Monthly mortgage payment: $1,600
    • Minimum monthly credit-card payment: $400
    • Monthly car payment: $500
    • Other debt obligations: $400
    • Total monthly debt = $2,900
    • Annual gross salary: $85,000
    • Gross monthly income: $7,083
    • Debt divided by income = 41 percent (2900 / 7083 = .41)

    In this scenario, I'm using 41 percent of my gross monthly income to cover my combined debts. This puts me right on the "line," as far as mortgage qualification. Most lenders would qualify me in this range, as long as I had decent credit and a down payment of some kind. But if my debts were any higher (or my income any lower), it would probably make my back-end ratio too high.

    Don't worry about doing the math. You can find plenty of calculators online to do the math for you. They can help you find out how much income you need for mortgage approval (based on the 29 / 41 ratio requirements we talked about earlier). To find these calculators, just do a Google search for the phrase "debt to income calculator." You'll find plenty of these tools online. Many of them offer additional information on how lenders qualify borrowers, based on income level and other factors.

    Applying for a Mortgage Quote

    When you've done the necessary research, and you feel you're ready to take on a mortgage loan, the next logical step is to apply for quotes from lenders. The Internet makes this process fast and easy. You can apply for a mortgage loan online to get the ball rolling. The lender would then follow up with you by phone or email, to request additional documents. They'll also tell you what kind of income you might need to be approved for the loan (i.e., maximum debt-to-income ratio).

    One thing I've noticed over the years is that a lot of people are reluctant to take this next step. I'm not sure why, but I think people feel they'll be obligated into something once they apply for a loan -- or that they'll damage their credit score by applying for a mortgage. But this is not true. You can get offers from a handful of lenders and choose the one that suits you best. You can reject any offers you don't agree with. You won't encounter any obligations at this point in the process, so you really have nothing to lose.

    Don't Overstretch Your Income

    The last point I want to make is that a mortgage lender cannot tell you what you can afford. They can only tell you what they are willing to give you, in terms of the loan and the interest rate. You must determine your own affordability limits, before you even start talking to lenders. It's possible to qualify for a mortgage that's too big for you, based on your income level. It happens all the time, and it often turns into a foreclosure situation. So don't buy beyond your means.

    This article answers the question: How much income is needed to qualify for a mortgage loan? If you would like to learn more about the home-loan process, you can use the search tool at the top of this page. It gives you access to a library of more than 800 articles. We have addressed