Mortgage income requirements for 2023

November 8, 2022 - 7 min read

How much income do you need 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 that there’s actually no minimum income required to buy a house.

Instead, you must earn enough to qualify for the requested loan amount. And the money you 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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Income requirements to buy a house: Key takeaways

Home buyers at any income level can apply for a mortgage. The most important thing isn’t how much money you earn, but rather, that your income meets a few key requirements.

Income requirements for a mortgage:

  • You need a reasonable debt-to-income ratio — usually 43% or less
  • You must have been earning a steady income for at least two years
  • Your income must be expected to continue for at least three 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, bonus, and RSU income.

Thanks to today’s flexible mortgage programs, you don’t need a high salary to buy a home. Low-income mortgage programs can make buying affordable even for families without a lot of cash flow or savings.

Mortgage income requirements in 2023

There’s no true “minimum” income requirement to buy a house. Lenders just want to know if 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 “left over” each month for a mortgage payment.

Your annual 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 loan payments over that time.

Most home loan 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 annual income will likely remain reliable for at least three years after closing on your home purchase.

There are exceptions to the two-year income rule, though. For example, “If you are in a profession like a nurse or a lawyer and you recently graduated, schooling will count towards this 2-year requirement,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.

What sources of income qualify for a mortgage?

Mortgage lenders can approve borrowers with all sorts of income, such as salaried employees, hourly wage earners, freelancers, business owners, and those who receive Social Security payments. But any source of income must meet certain guidelines to qualify on a mortgage application.

Employees (salaried/hourly wage)

Employees can use the 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. Annual 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.

Freelancers and 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 annual 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 your 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. As a rule of thumb, the more business deductions you have, the less you earn on paper.

Other types of income that count toward mortgage qualifying

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

  • Dividend income: 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 and 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 sources of income are eligible and the home prices you can afford based on your monthly cash flow.

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.

Keep in mind, too, that 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.

Debt-to-income ratio and why it matters

Lenders don’t just look at how much income you earn. They consider income as part of your debt-to-income (DTI) ratio. This is the percentage of your gross monthly income — your pre-tax income before deductions — that goes toward minimum debt payments. Your DTI ratio tells lenders the monthly mortgage payment you can afford.

These pre-existing debt obligations have an impact on affordability. Typically, the more total debt you have, the less you can afford to spend on housing costs. For this reason, two borrowers with the same income might not qualify for the same loan amount.

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

Now let’s say you have other debt — maybe a car payment, a student loan, and credit card payments. Your lender might say you can only afford to spend up to 25% of your gross monthly income on housing expenses. 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 mortgage payment of 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.

Other requirements to qualify for a mortgage

The amount of money you earn isn’t the only thing that matters when buying a home. You should be mindful of other factors lenders take into consideration when reviewing your application:

  • Credit score: Most mortgage programs have a minimum credit score requirement. Conventional loans (the most common type) require a 620 FICO score; FHA loans require a 580 minimum; VA loans usually require 580-620; USDA loans require a 640 score
  • 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 reserves: You need enough cash saved to cover the down payment and closing costs. Lenders may want to see “cash reserves,” too, meaning you have enough cash left over in the bank to cover 2-6 months worth of mortgage payments if your income were to be cut off

If you’re buying a house with low income, these other factors can help you qualify. For example, a higher credit score or bigger down payment could make up for a lower income and higher DTI. Your mortgage lender will look at your entire financial profile — not just income — to see if you can afford a home.

Determine your required income with a mortgage calculator

This home affordability calculator is a useful tool that helps you determine the income required for a mortgage and the overall cost of homeownership at today’s mortgage rates. This includes your loan principal, interest rate, property taxes, and homeowners insurance — commonly referred to as PITI.

PITI is an acronym that means:

  • (P) Principal: The amount of your mortgage loan’s principal balance repaid each month
  • (I) Interest: The amount of interest your mortgage lender collects on the loan
  • (T) Taxes: Property taxes required by your city and county government
  • (I) Insurance: Homeowners insurance and, if required, private mortgage insurance premiums (PMI)

The mortgage calculator will estimate your monthly payment using your PITI and additional inputs, including purchase price, down payment, state of residence, and loan term. Furthermore, you’ll be able to filter results by monthly mortgage payments, income requirements, and home price.

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 preapproved for a loan before shopping for a new home. This way, you’ll know how much house you qualify for with your current income. You can then search for real estate within that price range.

Valencia Higuera
Authored By: Valencia Higuera

The Mortgage Reports contributor

Valencia Higuera is a freelance writer from Chesapeake, Virginia. As a personal finance and health junkie, she enjoys all things related to budgeting, saving money, fitness, and healthy living.