Calculating the Income Required for a Mortgage
You've got a home or a price range in mind. You think you can afford it. But will a mortgage lender agree?
Mortgage lenders tend to have a more conservative notion of what's affordable than borrowers do. They have to, because they want to make sure the loan is repaid. And they don't just take into account what the mortgage payments will be, they also look at the other debts you've got that take a bite out of your paychecks each month.
To see if you qualify for a loan, mortgage lenders look at your debt-to-income ratio, or DTI. That's the percentage of your total debt payments as a share of your pre-tax income. As a rule of thumb, mortgage lenders don't want to see you spending more than 36 percent of your monthly pre-tax income on debt payments or other obligations, including the mortgage you are seeking. That's the general rule, though they may go to 41 percent or higher for a borrower with good or excellent credit.
For purposes of calculating your debt-to-income ratio, lenders also take into account costs that are billed as part of your monthly mortgage statement, in addition to the loan payment itself. These include property taxes, homeowner's insurance and, if applicable, mortgage insurance and condominium or homeowner's association fees.
Your debt-to-income ratio also takes into account such things as auto loans, minimum credit card payments, installment loans, student loans, alimony, child support, and any other payments you are required to make each month. It doesn't include routine monthly charges for things like utilities, internet service, cable or satellite TV, mobile phone subscription or other charges for ongoing services or other things where the charge is newly incurred each month.
So to calculate if you have the required income for a mortgage, the lender takes your projected monthly mortgage payment, adds to it your minimum monthly payments for credit cards and any other loans, plus legal obligations like child support or alimony, and compares it to your monthly income. If your debt payments are less than 36 percent of your pretax income, you're in good shape.
What if your income varies from month to month? In that case, your lender will likely use your average monthly income over the past two years. But if you earned significantly more in one year than the other, the lender may opt for the average of the year with lower earnings.
Finally, your required income doesn't just depend on the size of the loan and the debts you have, but will vary depending on what your mortgage rate is and the length of your loan. Those affect your monthly mortgage payment, so the mortgage income calculator allows you to take those into account as well.
Using the Mortgage Income Calculator
Begin by entering the desired loan amount, expected mortgage rate and length of the loan in the spaces provided. As you do, you'll notice that the required income and a calculation of the monthly mortgage payment immediately appear in the blue box at the top of the calculator.
Note that the loan amount and interest rate can be adjusted by using the sliding indicators; left-click and hold on the green triangles to adjust the figures. As you do, the required income level and monthly mortgage payment will immediately change as well.
The calculator also lets you enter information for monthly debt liabilities and housing expenses, and to view how the required income would vary across a range of interest rates. These sections may be displayed or hidden by using the plus (+) or minus (-) symbols at the right side of the column.
Don't enter your information for tax payments, homeowner's insurance or other fees billed on your mortgage statement here, though – those are entered under "housing expenses" further down.
This is where you would enter figures for the minimum monthly payments you must make for such things as auto loans, credit cards, student loans, child support and other obligations. Enter the minimum that is required and not any higher amount you might voluntarily make.
Enter the same information for your co-borrower, if there is one and the two of you have separate liabilities.
Note that these are for debts and other payments you are legally required to make; don't enter such things as utility payments, cable or satellite TV, Internet service or other recurring expenses.
Just as with the loan amount and interest rate, you can adjust these figures using the sliding triangles and the required income and monthly loan payments in the blue box will change immediately.
Here is where you enter the additional costs that are typically billed as part of your monthly mortgage payment: property taxes, homeowner's insurance, homeowner's association fees or dues, and private mortgage insurance (PMI) or FHA mortgage insurance, if applicable. Use the worksheet indicated to enter estimates for those figures.
You will only need to enter figures for homeowner's association fees if you are planning to buy a condominium, co-op, a home in a planned unit development or similar cooperative arrangement. You will only need to pay for mortgage insurance if you make a down payment of less than 20 percent of the home's value.
Mortgage insurance typically costs 0.5 – 1.0 percent of your loan amount per year, billed monthly, though it can go higher or lower depending on your credit score, down payment and length of your loan.
Required annual income for a variety of interest rates
This feature shows how the income required for a home loan of a certain amount varies across a range of interest rates. The lowest rate in the table is the one you selected in the calculator.
Viewing your report
The "View Report" feature will take you to a page summarizing the information you have entered and a table showing the income required for you loan for a range of mortgage rates.
Notes on using the Mortgage Income Calculator
This calculator provides a standard calculation of the income needed to obtain a mortgage of a certain amount based on common industry guidelines. These guidelines assume that your mortgage payments, including taxes, insurance, association fees and PMI/FHA insurance, should be no greater than 28 percent of your monthly gross income.
In addition, these guidelines assume that your mortgage payment and other monthly debt obligations combined should not exceed 36 percent of your monthly gross income.
Those are the base guidelines; however, borrowers with excellent credit and healthy financial reserves can often exceed those guidelines, going as high as 41 percent of gross monthly income for mortgage payments and debt obligations combined. You may wish to take that into account when considering your own situation.
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