When you apply for a home loan, your mortgage lender considers your gross monthly income to determine your loan amount. After all, a perfect credit score won’t do anything to help you keep up with a $7,500 mortgage payment if you make $5,000 per month.
Mortgage lenders are generally willing to lend you money up to the lesser of the following amounts based on your debt-to-income (DTI) ratios:
- 28% front-end DTI ratio: The principal balance where the monthly mortgage payment on the loan reaches 28% of your gross monthly income.
- 36% back-end DTI ratio: The principal balance where your total monthly debt payments, including your future housing expense, reach 36% of your monthly gross income.
For example, say you make $75,000 a year, which equals $6,250 in monthly gross income. 28% of that is $1,750, and 36% is $2,250. Assuming you have no other debts, you could qualify for a loan with a monthly payment of up to $2,250.
At 3% interest, a $2,250 monthly loan payment would mean you have a mortgage with a $433,360 principal balance. Assuming you put down 20%, that’s a home purchase price of 541,700.
Now, let’s work backward from the most recent data to figure out what those numbers look like for the typical American consumer in 2021.
The median home purchase price in Q2 of 2021 was $374,900. The median down payment in June 2021 was $27,850, which is about 7.4% down and leads to a mortgage with a $347,050 principal balance.
In August 2021, the average credit score among people who used a mortgage to buy a home was 741. As of October 2021, that would give you an interest rate of roughly 2.916%. At that rate, a $347,050 mortgage would have a monthly payment of $1,741.
If you can afford a monthly payment of $1,741, you must have a monthly gross income of at least $6,218 to clear the front-end DTI ratio requirement because 28% of $6,218 is $1,741.
Say you have $600 in other monthly debt payments. You’d need to earn $6,503 per month to clear the back-end DTI ratio requirement.
Multiplying the larger of the two amounts ($6,503) by 12 tells you that you’d need roughly $78,036 per year to qualify for a typical mortgage.
Of course these numbers are all based on national averages. The home prices in your local area may be considerably different from these numbers.
What Is the Minimum Income to Get Approved for a Mortgage?
Technically, there is no minimum income to get approved for a mortgage. It all depends on the other factors that impact the math, like mortgage rates, down payments, existing debts, and home purchase prices.
To calculate the required income for a loan, figure out all of those other variables first, then plug them into a mortgage calculator to get your monthly payment.
Once you have that, multiply the greater of the following by 12 to get your minimum pretax income for the mortgage:
- Your monthly mortgage payment divided by 28%
- Your total debts, including the mortgage divided by 36%
Take a look at the results below for some examples of various financial situations.
Minimum Annual Incomes and Home Prices
| Home Price | Down Payment % | Annual Percentage Rate (APR) | Mortgage Payment | Other Debt Payments | Minimum Annual Income |
| $150,000 | 20% | 3% | $670 | $100 car loan payment | $28,704 |
| $250,000 | 15% | 3.1% | $1,138 | $500 student loan | $54,600 |
| $350,000 | 10% | 3.2% | $1,624 | $350 personal loan | $69,600 |
| $450,000 | 5% | 3.5% | $2,225 | None | $95,357 |
Earnings-Related Mortgage Qualifications
For a first-time borrower, the mortgage loan program can be intense. Your loan officer is going to ask a lot of questions about your income, credit history, existing debts, and more.
Here are some of the most significant earnings-related qualifications to your mortgage lender.
Salary
Every mortgage lender is going to want to be intimately familiar with your salary. They’ll need you to verify the amounts you earn on a monthly and annual basis by providing copies of your tax returns, pay stubs, and W-2.
If you have other revenue streams, such as rental income, you should report them too. But they might not help your application much if they’re new or inconsistent.
Your lender uses your income to figure out what you can afford. It doesn’t provide a complete picture of your finances, but it can rule out a lot.
For example, someone with a $250,000 salary can qualify for mortgages that someone with $50,000 could never, even if they had twice the security deposit.
After all, your monthly expenses, debt, or otherwise are somewhat malleable. It’s always possible to cut back on your spending and free up more money if you have a high salary.
Employment History
Keeping up with a mortgage is something of a marathon. You’re signing an agreement to make monthly payments for decades. As a result, your lender cares just as much about the stability of your income as its gross amount.
In other words, even if you have a high enough income to pay your mortgage currently, a lender may call into question your ability to pay it in the future if you have a shaky or thin employment history.
For example, they might not want to lend to you if you have:
- Spent consistently short stints at your previous positions.
- Only been at your current job or in the workforce for a few months.
- Had long periods of unemployment between jobs.
However, mortgage lenders generally only look at your employment history for the last two years, so you probably don’t have to worry too much about anything that occurred before then.
Unfortunately, if you’re self-employed, it can be harder to prove the stability of your household income. Lenders see small business owners as riskier than employees, so you may have to meet increased requirements.
For example, employees can usually qualify for a mortgage loan if they’ve been stable for the past two years. If they transferred to a new job in the same field during that time, they’ll probably still qualify.
However, if you switch from employment to self-employment, you don’t get the same benefit of the doubt. Lenders usually want to see you earn a steady profit for at least two years as a new business before they’ll lend to you.
Debt-to-Income Ratio
Loans and mortgage lenders all have DTI ratio requirements. Some focus primarily on the front-end ratio while others care more about the back-end, but lower is better for both.
To have the highest chances of getting approval for a mortgage, keep your ratios between 28% and 36%, respectively. However, if you can’t quite reach those, there is some wiggle room.
Some lenders have maximum allowable back-end DTI ratios between 40% to 50% and will still consider applications at those levels.
For example, the maximum DTI ratio for an FHA loan is generally 43%, while you can get away with 50% with a conventional loan. Remember, your back-end DTI ratio is your total monthly debt payments divided by your gross monthly income.
Your DTI ratios don’t include what you spend on things other than debt, but mortgage lenders consider those expenses too. Remember, they’re not asking you questions to check random boxes. They want to know that you can pay your housing costs.
As a result, they’ll usually check your bank statements to get a feel for your budget. If you have a history of overspending but plan to cut back on your mortgage, consider waiting to apply until you have six months of statements showing lower spending levels.
How to Prepare Your Finances For a Home
Becoming a homebuyer often involves making the most significant purchase of your life and taking on the biggest loan you’ll ever have at the same time.
No matter how you slice it, buying a home is a big deal, and you should make sure that your finances are as well prepared for the challenge as you can make them. Let’s take a look at what you should do to prepare.
Save Up a Down Payment
One of the first things you should work on to get ready for a home purchase is your down payment. It’s consistently the most troublesome obstacle to homeownership for most people, and it can take many months to save.
The sooner you start putting away money aggressively, the easier it will be to accumulate enough for a down payment at the size that you want.
Perhaps counterintuitively, you shouldn’t necessarily put down the highest down payment you can afford. Sometimes it’s better to put down less than 20%, even if you have the money for more.
A higher down payment lets you get a lower interest rate, avoid paying private mortgage insurance, and reduce the size of your monthly mortgage payment.
However, it also forces you to tie up more cash in your home. That lowers your effective rate of return on investment, stops you from putting your money in a potentially more profitable asset, and can leave you without any cash.
Whether you decide to put down 20% or not, you’ll usually want to have at least 5% to give yourself access to all the loan types and have some left over for closing costs or financial cushion.
Even if you use something that doesn’t require a down payment, like a VA loan, having extra cash makes everything easier.
Pay Down Your Current Debts
One of the best ways to prepare your finances for the mortgage process is to reduce your outstanding debts. It benefits the strength of your application in three ways:
- It can improve your credit score by demonstrating a positive payment history and reducing your amounts owed, which are worth a combined 65% of your FICO credit score.
- Paying off an account lowers your eventual back-end DTI ratio, which must be below 40% to 50% for you to qualify.
- Paying off debt lets you put more money toward things like your down payment, homeowners insurance, or emergency reserves.
However, there are some cases where reducing your current debts can backfire.
For example, having a single loan that’s 95% paid off and a credit utilization ratio (your total outstanding debt divided by your available credit limit) between 1% and 10% is usually better for your score than having no ongoing credit activity.
In addition, you don’t want to use all of your money to pay off your debt right before you need it for a down payment or mortgage closing costs.
Improve Your Credit Score
Improving your credit score is a side effect of paying down your debts, but that shouldn’t be the only work you do to increase your creditworthiness.
Your credit is the single most important determining factor in your mortgage interest rate, and every point you can add to it will put money back in your pocket.
For example, taking your FICO credit score from 650 to 700 would save you roughly $48,914 on a $300,000, 30-year fixed mortgage, based on the FICO Savings Calculator.
One of the best tools for improving your credit score is a Credit Strong credit-builder account. We put your loan proceeds in a savings account during the repayment term as collateral, so we don’t have to check your credit.
As you make your payments, we’ll report them to the three major credit bureaus, which improves your payment history, demonstrates your responsibility with installment debt, and improves your score.
Once you’ve paid off your loan amount or canceled your account, which you can do for free at any time, you get access to your cash savings. Which you can then use as a down payment on a house!
Credit Strong works, and it can work for you too. Try it out today!
CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.
