Things to Know about Income Requirements to Qualify for a Mortgage

Are you planning to buy a home through a mortgage? If yes, this post has crucial information about mortgage income qualifications. Of the many factors considered in the mortgage process, income plays a vital role. Lenders use your income to assess your ability to repay the loan, determine the loan amount you qualify for, and ensure you can manage monthly mortgage payments comfortably. Understanding income requirements will help you prepare and increase your chances of securing the mortgage you need for your dream home.

Are There Income Requirements For A Mortgage?

Mortgages do not have a specific income requirement across the board. Everything depends on the type of loan, current interest rate, and amount you’re borrowing. 

Usually, mortgage lenders look at your credit and financial details to help them figure out two things:

• How much loan are you eligible for?

• Based on the debt/income comparison, can you make a monthly payment?

Answers to these questions largely depend on your debt-to-income (DTI) ratio.

Debt-to-Income Ratio Requirements:

The DTI or "back-end" ratio measures gross monthly income to total debt payments. To determine your DTI ratio, you can divide the amount of money going to debts each month by gross monthly income.

Although there is no minimum income requirement to get a mortgage, there are certain limits to the DTI ratio that vary by loan type:

• Conventional loans: Up to 36%, but can be 50% with compensating factors – higher credit score, a significant down payment, or enough reserves.

• FHA loans: DTI cannot exceed 43%.

• VA and USDA loans: DTI ratio must be equal to or less than 41%.

Eligible Sources of Income to Qualify for Mortgage

Multiple income streams can help you qualify for a mortgage. The eligible income sources include:

• Employment income: Salary or wages, commissions, bonuses,  and overtime payments. If you’re self-employed, your income is also eligible for a mortgage.

• Schedule K-1: If you have a partnership, S corporation, or estate, your income and distributions are eligible for a mortgage.

• Retirement income: Pension income or Income from other retirement accounts, such as a 401(k), IRA, or 403(b).

• Rental income, which includes the accessory dwelling units (ADUs)

• Disability payments

• Social Security payments

• Dividend or interest income

• Alimony and child support

• Trust income

No matter what kind of income you have, your lender will require documentation to verify income for a mortgage.

What Percentage Of Your Earnings Should Be Used For Mortgage Payments?

Most financial advisors recommend using the 28/36 percent rule to determine how much of your income should go toward housing and debt payments. According to this guideline, your total monthly mortgage payment should not exceed 28% of your gross monthly income, while your total monthly debts (including mortgage, car loans, credit cards, etc.) should not be more than 36% of your gross monthly income.

For example, if your gross monthly income is $5,000, your mortgage payment should ideally be no more than $1,400 (28% of $5,000), and your total monthly debt payments should not exceed $1,800 (36% of $5,000). This helps ensure that you can comfortably manage your housing costs while also meeting other financial obligations.

Other Factors That Impact Mortgage Qualification

In addition to your earnings and DTI proportion, loan providers will also take a look at the following:

Employment History: Although different lenders have different employment requirements, most of them require 2 years of stable employment evidence. 

Credit score: To qualify for a conventional loan, you must have at least a 620 FICO score. For those who do not qualify, you can compare the best FHA Loans that will allow scores as low as 580. Your score is correlated to the rate at which lenders give you money; a higher score means better rates!

Credit: Besides checking your credit score, lenders want to know about your credit history. This way, they can determine if you have a history of late payments, foreclosures, or bankruptcies on your credit report.

Down payment: You can put down as little as 3% DP for a conventional loan. FHA loans require 3.5%, and VA & USDA do not require a down payment. Similar to credit scores, if you make higher down payments, you can secure better interest rates.

Cash reserves: This is not a main requirement, but some lenders like to know whether you have money saved up (or ready) to pay your mortgage for several months.

Low-Income Loan Options For Mortgages

Your income is not the only parameter to prevent you from buying a house. Here are a couple of other mortgage programs you can try if your income level is low.

Conventional loan programs: HomeReady and Home Possible are conventional mortgages for lower-income borrowers supported by Fannie Mae and Freddie Mac, respectively.  They come with a minimum down payment of just 3 percent.

HFA loans: These loans are provided by state housing finance agencies (HFAs) and are typically aimed at lower- to moderate-income borrowers. They offer benefits such as low down payment requirements and competitive interest rates and may include assistance with closing costs or down payments.

FHA loans: FHA loans, insured by the Federal Housing Administration, offer more flexible credit score and debt-to-income (DTI) ratio requirements compared to conventional mortgages. They require a minimum down payment of just 3.5 percent.

VA and USDA loans: No down payment is required if you qualify for these government-guaranteed loans.

Secure the Best Mortgage Rates Even with Low Income at a Total Mortgage

Stop letting fear of what "MAY" or "MAY NOT" happen take away your home-buying dreams. Talk to our experienced loan experts today to help you understand your mortgage income qualifications. Begin your path to homeownership!

Contact us today!