How Much Income Is Needed to Buy A Home?

How Much Income Is Needed to Buy A House?

If it is your first time purchasing a home, one of the first questions you probably have is “how can I qualify to buy a house?” or “what can I afford to spend on a house ?” There is no single answer to this question. It depends person to person and is based on your specific financial circumstances.

The amount of income you need to buy a home in Texas depends on several factors including the price of the home, the size of your down payment and the terms of your mortgage such as interest rate and loan term.

How is Income Calculated by Mortgage Lenders?

One of the main factors that mortgage lenders will use to determine what you can qualify to purchase is your monthly household income. Lenders use debt to income ratios to calculate what a potential homebuyer can qualify to purchase. Debt to income ratios simply stated are all your monthly debt payments divided by your gross monthly household income.

Debt includes anything that shows up on your credit report such as car payments, personal and student loans as well as the proposed mortgage payment for the new property that you intend to purchase. Liabilities that are not reported on the credit report such as utilities, phone bills, rent for the property you are moving out of, etc. will not be factored into that debt-to-income ratio. For certain loan types such as VA loans, childcare expenses will also be factored into your debt-to-income ratios.

This means that we need to determine what your proposed mortgage payment will be to determine your final debt to income ratio. Purchase price, down payment, and loan terms all affect this. You can use our online mortgage calculator here to determine what your monthly mortgage payment will be.

You should determine your purchase price based on not only what you qualify for based on your debt-to-income ratios but also what you are comfortable paying monthly. A mortgage is typically a thirty-year commitment, so you want to make sure you are comfortable with that payment for the next 30 years.

Loan terms such as interest rate and mortgage length also affect this monthly payment. Interest rates fluctuate daily and can impact on the monthly payment significantly. It is worth mentioning that there are numerous factors that impact the interest rates available to you, such as credit score, loan type, property type, down payment size, loan amount, and more.

Additionally, the shorter the term you take, the higher the monthly payment will be. Typically, most buyers take a 30-year mortgage term, but JVM does offer 10, 15, 20 and 25-year terms as well.

Most loan types, such as conforming or conventional loans, require a debt-to-income ratio of 49% and under. Some loan types such as government backed loans, like FHA loans or VA loans, are more flexible than others and will allow you to have up to a 56% debt to income ratio.

Other loan types are stricter such as jumbo loans and will only allow up to a 43% debt to income ratio. Your lender will be able to recommend a loan type that is best for you and your specific financial circumstances.

What Can I Afford to Buy in Texas?

Now let’s get into how much income is needed specifically to buy a home in Texas.

According to Zillow, the median home price in Texas is $315,831. This price will vary significantly based on where you decide to buy within Texas. Homes in some areas of the state may be more expensive than others, which affects the amount of income that you need to qualify for a mortgage.

The type of property you are intending to buy will also affect the amount of income that you need to qualify for a mortgage. Typically, single family homes are more expensive in terms of purchase price than townhomes or condos. However, townhomes and condominiums do have monthly HOA or homeowners’ association that can increase your monthly payment and therefore, the amount of money that you need to qualify for the property.

Looking at a single-family home at the median home price of $315,831, you would need a monthly household income of $4,750. Annually, this comes out to 57K. At $315,831 with 20% down, assuming a 6% interest rate your monthly mortgage payment would come out to $2,273 including your property taxes and homeowners’ insurance.

This scenario assumes no monthly debt. If you have debt such as car loans, or credit cards, you will need more income to qualify.

Let’s assume that you buy a condo or townhome with a $500/ month HOA due. At that same purchase price of $315,831, you would need a monthly household income of $5,750. The homeowner’s association dues would increase your mortgage payment from $2,273 to $2,773/ month. For every $100/ month in HOA dues, a client will typically qualify for $10,000 less in purchase price.

Next Steps?

Are you interested in buying a home?

Step One: Talk With a Lender and Get Pre-Approved.

Your lender should be able to calculate your debt-to-income ratios for you to let you know exactly what you can qualify to purchase. They will issue you a pre-approval letter based upon this. JVM is licensed in Texas and can help you with any of your financing needs in the state!

Step Two: Find a Reliable and Knowledgeable Real Estate Agent

Once you have a pre-approval letter in hand, you should contact a real estate agent who can take you to see properties within your price range. You should be transparent with your realtor about your price range and provide them with the pre-approval letter from your lender.

If you find a property that you would like to purchase, your realtor should be able to write an offer on the property. Now, we wait and see if the offer is accepted!

Step Three: Accepted Offer in Hand

Good news, your offer is accepted! JVM will take care of your financing needs and next steps from here. You should be able to close on your home as quickly as 14 days from the day your offer is accepted. You will be in your new home in no time!

Summary

For new homebuyers starting out, the first step in finding out how much home you can afford is talking with a reputable local lender, Like JVM Lending. Our advisors specialize in working with new homebuyers, excited to start the journey to homeownership.

The main factor in determining your home affordability will be your personal debt to income ratio. This ratio is calculated by dividing your monthly debt payments by your gross monthly household income.

Most lenders and loan types have specific DTI ratio requirements. Conforming and conventional loans typically require a homebuyers DTI to be less than 49%, meaning that your monthly expenses (including housing payments) be less than 50% of your total monthly gross income.

For government backed loans like FHA or VA loans have a more generous requirements and allow borrowers to qualify for a home loan with a DTI up to 56% However, jumbo loans have stricter qualification requirements all around, and most require a DTI ratio of less than 43%.

A mortgage lender can help you calculate your debt-to-income ratios and can make sure you know exactly how much house you can qualify for so that you can be sure to look at homes in your price range that you can comfortably afford.