This is a very good question. If you are interested in buying a house “How much income do you need to buy a house” will probably be one of the first questions that come to mind.
Anyone that is thinking about buying a home should consider their income but that is not the only deciding factor to being able to get a loan to buy a house.
Therefore I will cover the topic of income and the other factors such as Debt and Credit Score in this article. My goal is not just to tell you what income you need but my goal is to help you fully understand what it takes to qualify to buy a home with a loan.
If you would like to know what is involved in get Preapproved for a home loan check out my article “Loan Prequalification or Preapproval”.
1. Income Requirements
How Much Income Do You Need to Buy a House?
There is no short answer to this. There are so many factors involved in qualifying for a home loan that all revolve around income. I will try to explain how it all works.
The simplest way to explain “how much income is needed to buy a house”, would be the more income you have the more expensive a house you can buy.
Like I already said there is more to it then that though, if only it could be that simple. I am going to just focus on income in this first point, so we will assume you have no debt. (wouldn’t that be great right?)
The average price of homes sold in the USA is $226,500.
To qualify to buy a home with this price tag on it with a loan, you would need to make $58,200 annually.
This does not factor in anything for debt or other loans you may have, we will get to that later.
This also does not factor in home insurance or property taxes, we will do that now.
We will add in property tax and homeowner’s insurance to get you a more realistic annual income requirement. We will again use averages for this.
Average property tax in the USA is $2,200.
Average Homeowner’s insurance in the USA is $1,300.
Adding in the averages for homeowner’s insurance and property tax to the average home price in the USA you would now need to make $70,800.
That is $12,600 higher then the first number we came up with. I say this to show you how much difference it makes when you have higher property taxes or homeowner’s insurance. These should both be a factor in your decision of what house to buy.
Now we will look at how much difference it makes when adding in debt payments.
2. Effects of Debt
Adding in your debt payments will greatly affect how much home you qualify for. This will include all loan payments, car payments, credit card payments, Alimony and Child Support payments and student loans.
Debt will affect your ability to buy a home in two ways, it will lower the amount you are approved for (the price of the home) and it can cause you to not qualify for the loan at all.
Debt to Income Ration
We will look at the affect of debt on the purchase price in a few minutes but first I want to go over debt to income ratio.
Debt to income or DTI ratio will for the most part be the same for all lenders. They will require you to have a debt to income ratio to be less then 36%. There are a few exceptions to this though.
The 36% debt to income ratio will be determined by adding up your monthly debt payments and then dividing that by your monthly income.
If you have $1,500 in debt payments each month and your monthly income is $4,500 then your debt to income ratio would be 33.3%.
The formula is Debt ÷ Income = Debt to Income Ratio
Debts Effect on Purchase Price
We will use the average car payment in the USA which is about $500.
With just this one car payment added in your purchase price limit will come down by about $4,000. So, to afford the same exact house mentioned above you would need to make about $72,000 annually.
This may not seem like much of a difference but when you figure it out hourly it would mean that you would need about a $0.58 per hour raise.
Now let’s add credit card payments to the equation.
The average credit card debt in the USA is about $5,800 and a monthly payment of $285 if not making just the minimum payments (meaning they plan to payoff the balance of the credit card within two years).
Adding this monthly payment into the equation you will now need to make $81,300 annually or just under $10,000 more per year due to the credit card debt.
This is why you should never carry a balance on your credit card!
I know not everyone has student loan payments or credit card debt but about 40% of Americans have credit card debt and about 25% of Americans have student loan debt.
To calculate the effect of having student loan debt I will take out the credit card debt and add in the student loan debt.
This will bring you to almost the same figure as the credit card debt. You will have to make $81,000 annually to afford a $226,500 house.
You can see that every dollar you pay as a debt payment each month really hurts your ability to purchase a home. Every case is different, and you will have different amounts of income and debt payments and other factors that will determine your ability to get approved for a home purchase loan.
I suggest contacting a lender to get the exact numbers ad checking out my article “Loan Prequalification or Preapproval”.
3. Credit Score
Credit score is an important factor in getting approved for a home purchase loan. It will also affect your interest rate.
For starters, your lender will have a minimum requirement for your credit score. This will most likely be around 620 for most loan products. There are loan products offered by some lenders that will allow you to have a score as low as 580 but there will be additional requirements involved.
Using 800 (typically the best rate bracket) as a base score we will look at how much difference your score makes on the amount you can get approved for on your home purchase loan.
|Interest Rate |
|Additional Income Needed |
to Purchase Same Home
|700||Up 0.55%||$3,300 Annually|
|650||Up 1.37%||$8,400 Annually|
|620||Up 1.59%||$9,600 Annually|
*The figures above are estimates and national averages and they are used as examples.
As you can see your credit score will not only affect your ability to get a home loan it will also affect how much you will be allowed to spend to purchase the home.
Does this all seem confusing? Let me simplify. The more money you make the more home you can buy. The more debt you have the less home you can buy.
You don’t have to worry about the details of all of this because a good loan officer will be able to walk you through all of this rather quickly. Talking to a lender should be the first thing you do when thinking about buying a home.
Check out my article “Path to Homeownership” for a detailed step by step process of buying a home.
Leave me a comment or send me an email with any questions you have about the process of getting approved for a home loan of the process of buying a home.
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