Housing Finances

How Much Income Do You Need to Buy a House?

Written by Zillow.com
Published Oct 18, 2012 - [Updated Oct 13, 2020]
2 min read
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If you’re in the market for a new home, chances are you’ll have to compromise at some point along the way. Maybe you’ll have to commute a little farther than you’d like in order to get the best value for your money, or perhaps you’ll forgo a huge backyard to be closer to the city.

And when it comes to finances, you might find a disparity between how much house you want and how much house you can afford.

Home loans are made against your ability to repay. While the mortgage loan is secured against the house, it is really made against your income. That’s what mortgage lenders look for — income to offset liabilities.

Simply put, the amount of income you need to purchase a house will vary by your payment comfort level, including any other monthly debt obligations you might have.

Important terms

Mortgage payment: Principal, interest, property taxes insurance and mortgage insurance, if needed.

Consumer debts: Minimum payment obligations on things such as auto loans, credit cards, student loans, personal loans and installment loans.

Other debt obligations: Alimony and/or child support or any other court-ordered repayment obligations.

Running the math

Here’s a simple formula to calculate the amount of income you’ll need to purchase a home:

(Target mortgage payment + consumer debts) ÷ .36 = Gross monthly income needed to qualify

Most lenders limit your debt-to-income ratio (how much of your monthly income pays debt) to between 36 percent and 45 percent. While the exact ratio varies by lender and loan type, it’s best to base your calculations on the lower end to ensure that you won’t overextend yourself financially.

So, if your target mortgage payment is $2,000 per month and you have consumer debts of $300 per month, you will need approximately $6,388 gross monthly income to offset your housing expenses and consumer obligations.

Down payment

Your down payment is another important factor in determining how much income you’ll need to buy a home.

Consider the following loan scenario using a purchase price of $300,000 (assuming no other debts) and the current rates on Zillow Mortgage Marketplace.

Conventional loan

Down payment: 5 percent ($15,000)
Interest rate: 3.26 percent
Approximate mortgage payment: $1,770
Gross monthly income needed: $4,916

So, at the end of the day, how much income you need to purchase a home is predicated on your monthly income, consumer debt obligations and down payment.

Impact of debt

For every dollar of debt, you will need double that in income. So if you have a $300 car payment, you’ll need at least $600 per month or more in income to offset that debt.

Debt erodes income, and less income translates to less purchasing power.

So, does buying a home make sense?

Yes, so long as the amount you can borrow for your desired purchase price is in sync with your debt obligations and, of course, your down payment.

“How Much Income Do You Need to Buy a House?” was provided by Zillow.com.