Income Needed to Qualify for a Mortgage Loan

Income Needed to Qualify for a Mortgage Loan

When you apply for a home loan, the mortgage lender will conduct a thorough review of your income situation. Income is one of the most important factors to a lender, along with your credit score and debt level. This article answers a common, income-related question that home buyers often ask: How much income is needed to qualify for a mortgage loan?

The first thing to know is that mortgage lending standards and requirements can vary 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 “border” of acceptability, one company might approve me for the loan while others turn me down. That’s because they have their own business models and assessment procedures.

In addition, your household income level is only one piece of the mortgage qualification process. Lenders will review other things as well, including your credit score and your total amount of debt. Remember, your debt takes away a big part of your income — so the two things are usually reviewed together.

How Much Income to Qualify?

These days, most lenders set the bar somewhere around 43% to 45% for the total debt-to-income ratio or DTI. This means that if your recurring monthly debts use up more than 45% of your monthly income, you might have trouble qualifying for a loan. On the other hand, a borrower who only uses about 35% of her income to cover the monthly debts should be in good shape, as far as lenders are concerned.

These numbers are not set in stone. Some lenders may allow total DTI ratios above 45%, especially when there are certain “compensating factors.”

According to the Consumer Financial Protection Bureau (CFPB):

“Larger lenders may still make a mortgage loan if your debt-to-income ratio is more than 43 percent … But they will have to make a reasonable, good-faith effort, following the CFPB’s rules, to determine that you have the ability to repay the loan.”

So, where do you stand? What’s your total debt-to-income ratio? You can find plenty of calculators online to help you calculate your DTI level. That’s a good place to continue your research.

Applying for a Mortgage Quote

When you’ve done the necessary research, and feel that you’re ready to take on a mortgage loan, the next logical step is to apply for quotes from lenders. The good news is that this process is easier than ever, thanks to the internet. You can apply online and get information sent to you by email.

Granted, you’ll have to fill out a more complete application at some point, along with plenty of supporting documents (tax records, bank statements, etc.). But the initial online application is a good way to get the ball rolling.

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 lend you, in terms of a loan. You must determine your own affordability limits before you even start talking to lenders.

Doing some basic budget math up front could help you avoid financial issues down the road. So take a good, hard look at your current debt and income situation — and decide what you’re comfortable paying each month in the form of a mortgage payment.

How to Prepare for a Competitive Real Estate Market

How to Prepare for a Competitive Real Estate Market

Home buyers who are planning to enter the real estate market can benefit from having their financing arranged ahead of time. What does that mean exactly, and why is it so important in the current real estate market? Here’s what you need to know.

Many real estate markets across the country are highly competitive right now due to a lack of supply. There are plenty of people in the market looking to buy a home, but there’s not enough inventory to go around. This supply and demand imbalance puts upward pressure on home prices and makes things more competitive for buyers.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, recently cited this as one of the primary factors influencing the market right now. “The major constraint in the market right now is the lack of supply,” Fratantoni told CNBC. “The absolute number of units on the market is near an all-time record low.”

Competing in a Tight Real Estate Market

In a competitive real estate market, home buyers want to have every possible advantage going for them. Among other things, home buyers can benefit from having their financing lined up ahead of time before they even start looking at houses.

This might mean one of two things, depending on your money situation:

  • If you’re planning to pay cash for a house, the seller will probably want to see bank statements proving that you have the funds in the bank.
  • If you’re like most home buyers, and you will be using a mortgage loan to help finance your purchase, the seller will probably want to see that you’ve been pre-approved by a mortgage lender already.

Benefits of Mortgage Pre-Approval

Mortgage pre-approval is basically a kind of financial pre-screening process. This is where a bank or mortgage company reviews your current financial situation to determine (A) if you’re a good candidate for a home loan, and (B) how much you can borrow. This helps you, the buyer, in two ways:

  • Getting pre-approved for a mortgage can help you narrow down your housing search to the kinds of properties you can actually afford, based on your financing. This will make your house-hunting process more efficient.
  • Mortgage pre-approval could also make sellers more inclined to take your offer seriously since you’ve been working with a mortgage lender already.

Both of these things could give you a much-needed advantage in the marketplace. This is especially important in an active real estate market where homes are selling quickly, and where multiple offers are a common occurrence.

The current inventory situation across the country also underscores the importance of having professional help from an experienced real estate agent. An agent can help you find a property that meets your needs, evaluate the seller’s asking price, and make a strong offer in a timely fashion. This is the key to success in a competitive real estate market.