Income requirements for a home loan: 2022 Income guidelines

Valencia Higuera
Valencia Higuera
The Mortgage Reports Contributor
November 8, 2021 - 6 min read

Is there a minimum income to buy a house?

Home buyers need to meet certain standards to get a mortgage. There are minimum credit scores, employment requirements, and more.

But many first-time home buyers don’t realize — there’s actually no minimum income required to buy a home.

Instead, you must earn enough to qualify for the requested mortgage amount. And the money your earn must be an acceptable type of income (though most types are perfectly fine).

Here’s how to determine if your income will qualify for a mortgage.

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Key takeaways

Home buyers with all levels of cash flow can qualify for a home loan, as long as their income meets a few key requirements:

  • You need a reasonable debt-to-income ratio — usually 43% or less
  • You must have been earning steady income for at least 2 years
  • Your income must be expected to continue for at least 3 years

Outside of those basic criteria, income requirements for a home loan are flexible.

Most types of income can qualify — from standard salaries to commission, investment, self-employment, and bonus income.

And, thanks to today’s flexible mortgage programs, you don’t need a high income to buy a home. Low-down-payment mortgage programs can make buying affordable even for lower-income families who don’t have a lot of savings.

Income requirements to qualify for a home loan in 2022

There’s no true “minimum” income to buy a house. However, lenders want to know you can afford the mortgage. That means you need to prove you have enough income to cover your future monthly payments.

One way lenders determine affordability is by looking at your debt-to-income ratio (DTI).

DTI compares your existing monthly debts with your monthly income. This shows how much money you have ‘leftover’ each month for a mortgage payment.

Your income must be reliable and stable, too.

After all, most mortgage loans last 30 years. So you need to have a steady cash flow and the ability to keep making payments over that time.

Most mortgage programs require two years of consecutive employment or consistent income, either with the same employer or within the same field. This is a sign of stability, indicating that your income will likely remain reliable for at least three years after closing on your home purchase.

What kinds of income qualify for a mortgage?

Mortgage lenders approve different types of borrowers, such as employees, freelancers, business owners, retirees, and those who receive support payments.

But although you can get a loan with different kinds of income, your income must meet certain guidelines.

1. Employees (salaried/hourly wage)

Employees can use income they receive from a salary, hourly wage, commissions, or overtime, as well as restricted stock unit income and bonuses for mortgage-qualifying purposes.

You must provide your lender with your most recent paycheck stubs, W-2s, and tax returns from the previous two years. Income must be consistent over this two-year period.

To use commissions, overtime, restricted stock unit income, or bonus income for qualifying purposes, you must show evidence of this income continuing for at least two to three years post-closing. This involves your employer providing written confirmation.

2. Freelancers/self-employed

Getting a mortgage as a self-employed person — which includes independent contractors, freelancers, gig workers, and business owners — is a bit trickier. But it’s not impossible by any means.

Self-employment income can fluctuate from year-to-year. Not only will you provide your complete tax returns from the previous two years, but your income must either remain the same or increase during these two years.

A minor decrease from one year to the next is usually okay. Just know that lenders typically average out self-employment income over this two-year period to determine your qualifying amount.

So if your freelance income is $40,000 one year and $75,000 the next year, your lender uses an income of $57,000 to decide affordability.

As a self-employed borrower, be mindful that too many business deductions on your tax return can reduce your qualifying amount. Lenders use your net income after deductions for qualifying purposes.

They can add back some deductions, such as those for mileage and use of a home office. But generally speaking, the more business deductions you have, the less you earn on paper.

3. Other types of income that count toward mortgage qualifying

Here’s what you need to know when using other types of income to qualify for a home loan:

  • Dividend income: These are cash payments received for owning stock in a company. This income must be regular, and you must show a two-year history of receiving dividends
  • Retirement income: Income must continue for at least three years post-closing
  • Social Security income: This income must continue for at least three years post-closing
  • Alimony/child support: You must have received regular payments for at least six to 12 months prior to getting the mortgage, and support payments must continue for at least three years post-closing. You’ll need to provide a copy of a divorce decree and other court orders

If you’re not sure whether your income qualifies, talk to a mortgage lender. Your loan officer can help you understand which types of income are eligible and how much home you can afford based on your monthly cash flow.

How do lenders determine your income for a home loan?

Lenders don’t look at income on its own. They consider income as part of your debt-to-income (DTI) ratio. This is the percent of your gross monthly income that goes toward minimum debt payments.

Your pre-existing debt obligations have an impact on affordability. And typically, the more debt you have, the less you can afford to spend on a mortgage.

For this reason, two borrowers with the same income might not qualify for the same mortgage amount.

For example, if you apply for a conventional mortgage you’re typically allowed a mortgage payment up to 28% of your gross monthly income. Your debt-to-income ratio (which factors in all monthly debt payments, including the new mortgage) cannot exceed 36%.

Now let’s say you have other debt — maybe a car payment, a student loan, and high credit card minimums. Your lender might say you can only afford to spend up to 25% of your gross monthly income on housing. Spending more would push your DTI ratio over 36%.

However, if another borrower earning the same income doesn’t have a car loan, a student loan, or credit card debt, they might be able to afford a house payment up to 28% of their gross income.

So basically, a lower debt-to-income ratio increases your purchasing power, allowing you to get more house for your money.

Are there income limits for a mortgage?

Some mortgage programs have income limits, meaning your income cannot exceed a certain percentage of the area’s median income (AMI) to qualify.

Standard conventional loans, VA loans, and FHA loans don’t have income limits.

But household income limits are typical with USDA loans and some specialized programs.

USDA loans, backed by the U.S. Department of Agriculture, are used to purchase homes in eligible rural areas. To qualify, though, your income cannot exceed 115% of the area median income.

Likewise, if you apply for Fannie Mae’s HomeReady mortgage, your income must remain below 100% of the area median income; and your income must remain below 80% of the area median income for Freddie Mac’s Home Possible mortgage.

Keep in mind, too, many down payment assistance programs have income limits. These limits vary depending on the program. Typically, your income cannot exceed 100% to 115% of the median area income.

Other factors that matter when qualifying for a mortgage

Income isn’t the only thing that matters when you buy a home. You should be mindful of other factors lenders take into consideration when qualifying borrowers for a home loan:

  • Credit score — Most mortgage programs have a minimum credit score requirement, which can range from 580 to 620 for an FHA and conventional loan, respectively; and 640 for USDA loans. VA loans don’t have a set credit score minimum
  • Credit history — Your recent credit history also determines whether you qualify for a home loan. Most programs don’t allow more than one 30-day late payment within the previous 12 months. You can also expect a waiting period after a foreclosure or bankruptcy, which can range from two to seven years depending on the home loan
  • Down payment — The size of your down payment also affects your qualifying amount. Borrowers with a bigger down payment have greater purchasing power
  • Existing debt load — Too many existing debts also reduces purchasing power. Paying down a car loan, a student loan, and credit cards can increase affordability.
  • Assets/cash reserve — Your cash reserve amount also affects qualifying. You must have enough funds in reserves for your down payment and closing costs

Do you qualify for a home loan?

Numerous factors determine whether you’ll qualify for a home loan. Your mortgage lender will look closely at your credit history, your debts, cash on hand, and income to gauge affordability.

Mortgage approval isn’t one-size-fits-all, so it’s also important to get pre-approved for a loan before house hunting. This way, you’ll know your qualifying amount with your current income. You can then search for properties within this price point.

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