How Much Money Do I Need to Make to Buy a Home?

Lenders determine affordability based upon a combination of factors including your gross monthly income, debt and current and future monthly payments to creditors. As that’s just one of the areas lenders evaluate it’s certainly one of the most important. Lenders make money on the interest collected from the loan and they want to make sure they’ll get paid back on time, every time. Ability to repay has been an oft-used term by lenders who review the debt-to-income ratio. That said, how much money do you need to make to buy a home?

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That obviously depends upon you and how much you make each month. But data service HSH Associates did some major data scouring last year and came up with some figures that might surprise you. HSH took various data points regarding median home value, prevailing interest rates, principal and interest payment along with a monthly amount allotted for property taxes and insurance. After reviewing the data, the most affordable place to live was back east, specifically Pittsburgh, PA. The most expensive? You guessed it- right here in California.

HSH figured those who live and buy in San Diego need to make an annual salary of at least $109,440 to finance a home with a mortgage. Los Angeles was a bit lower at $92,000 yet up in San Francisco, where the highest annual salary was needed, the figure comes in at $161,967. According to HSH, the average borrower would have to make at least six figures in different California cities. It’s not really a surprise for those who live here that home values are higher compared to other parts of the country while median family income is also higher.

Your Data

Okay, so you do live in San Diego County but you don’t quite make $109,440 per year? What does that mean exactly, that you have to sit on the sidelines? Of course not. The HSH analysis looked at values overall compared to other empirical data. Your ability to repay is calculated in the very same fashion as someone who makes $1 million or $50,000 per year. In fact, for conforming loans, lenders are required to perform an analysis to make sure your own debt-to-income ratios do not exceed 43. If a loan is approved and the total debt ratio is at or below 43, the loan receives protection from future litigation as the loan then conforms to standards labeled “Qualified Mortgage” or QM.

The number 43 is actually expressed as a percentage. Total debt includes the mortgage payment including principal and interest, property taxes, insurance and mortgage insurance when needed. In addition to the mortgage payment other monthly credit obligations are added in. These additional payments are those for minimum credit card payments, student loans, installment loans with more than 10 months remaining and other debt which appears on a credit report.

The lender then compares those monthly payments with gross monthly income and if the credit payments represent 43% or less of gross monthly income the loan can receive QM status. In addition, QM status must also mean the loan term cannot exceed 30 years, no “interest only” payments allowed and limits on the amount of points and fees that can be charged.

Okay, now let’s use those calculations and look at how much salary one needs to make in order to buy and finance a home. We’ll work backward and come up at an annual income requirement.

Let’s say there is a home listed at $350,000 and the borrowers are going to make a 20% down payment, or $60,000 for a mortgage amount of $290,000. They have a new car payment of $650 and student loans totaling $240 per month. Total installment debt is then $890. They have now other debt.

They select a 30 year fixed rate loan with an interest rate of 4.50%. Property taxes are $3,000 per year and insurance $1,500, or $250 and $125 each month respectively. The principal and interest payment on $290,000 at 4.50% is $1,469 for a total mortgage payment of $1,844. Adding the car payment and student loans to this comes to $2,734.

If the maximum total debt ratio is 43, that means the borrowers would need to make about $6,500 per month, or $78,000 per year. This is similar to how HSH came up with their numbers but they went about it in a different manner. Instead of picking out a particular property they used median home values for the area and prevailing interest rates.

While such data mining is interesting to read what’s more important is how it relates to you. Lenders will approve you based upon previously established lending guidelines and compare your monthly debt to income as they have been doing for years.

Will You Have Enough?

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We realize we’ve thrown in a lot of numbers here and we know it’s sometimes hard to read. But if your eyes glazed over for just a bit wading through all the ratios, taxes and mortgage payment, we apologize but did think it important enough to point out how HSH came up with the numbers they did. At first glance, especially for someone who has yet to apply for a first mortgage, they could see the HSH report and erroneously conclude they don’t make anywhere near enough each year to qualify for a home loan when we’ve just shown you that’s not the case.

Even though lenders use similar guidelines when evaluating a mortgage loan application there are really no two borrowers exactly the same. And because mortgage rates are dynamic and can change daily, the final data is also susceptible to error. The HSH report was fun to read and a bit eye-opening but remember you’re the only one that matters when you speak to your mortgage lender. You’re not a statistic. You’re a client.

Testimonials

“Chad and his entire team were over the top amazing, professional, and attentive throughout the entire home loan/buying process. I could not have asked for a better team to have on my side through what could be one of the most challenging and stressful processes one experiences. From the first conversation I had with Chad, I felt comfortable with him. He helped guide us through the process without ever once making us feel uneasy, unimportant, or uninformed. I never felt silly or stupid for asking the same questions over and over until I fully understood what we were getting into, or until something made total sense to me. The home loan world is fast paced, overwhelming, and confusing, and Chad and his team held our hands and helped us to feel comfortable and confident about our choices. He and his team were always there for us day or evenings, weekdays, or weekend and never made you feel like you were a bother if you had a burning question you had to get answered at 8pm Saturday night. I will use them again and again, and suggest them to any friend, family, or acquaintance. Seriously, they are rock stars. They work hard for you to get you into your dream home, we could not be happier with their hard work, dedication, and kindness.”

Outstanding experience

I was referred to Chad by my Realtor for a purchase of a new house. The experience with Chad and the team (I mainly worked with Juliann) was nothing short of outstanding. From start to finish there were always quick to respond and when needed, notify me of any new documentation that was required. There were very helpful explaining to me the pros and cons of different financing options as well as some other loan related issues, such as termite clearance outside the purchase contact and septic tank certification process. Overall, very knowledgeable and processional team. Loan preapproval was done in a single day and loan documents were ready for signing in 21 days, which was 9 days ahead of schedule. That never happened to me before.

“Chad and his team were fantastic. They were incredibly responsive to us and our needs. Chad laid out several refinance options for us, and was very supportive when we decided on the option we felt was best for our family. Chad and his team worked our deal and got our mortgage funded incredibly fast, with excellent service and even took the time to thank us personally once we funded. I can’t recommend Chad enough!”

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I hope you enjoyed reading this article. It's my goal to keep you updated with the latest real estate mortgage news. I'm proud to provide you with 100% original and unique content. Subscribe now to get high quality real estate mortgage content and articles delivered directly to your inbox. Chad Baker is Regional Manager for LendUS. Chad is consistently recognized in the top 1% of mortgage originators in the United States 2011-2017. Got a question for Chad? Call (858) 353-8331 or submit your question online