Calculating How Much Income You Will Need for a Mortgage
Before you begin shopping for a home, you will want to determine your purchasing power. Your lender will look at various financial factors to establish your credibility to repay your loan as a borrower. One of the most telling financial indicators your lender will use to determine your approval on a mortgage loan is your pre-tax gross annual income.
An income qualification calculator will assess these financial factors when determining the amount of income needed to qualify for a loan: home price, down payment, loan term, interest rate, and your total debt payments. The Home Loan Expert is here to break down each section of your mortgage income calculator so you can determine the amount of income required for a mortgage on your dream home.
What is Included in Annual Income?
Annual income is the amount of income you earn in one fiscal year. It can come from the following sources:
- Overtime pay
- Revenue from self-employment side hustles
- Dividends from businesses and investments
- Rent received
- Capital gains
- Money received from entitlement programs (social security, retirement funds, or pensions)
- Court-mandated alimony or child support payments
Inconsistent forms of income, like gifts, do not count towards your annual income.
What Information is Needed for a Mortgage Income Calculator?
Fill in the information for the entry fields below to determine the amount of income needed to qualify for a mortgage. From there, you can create a financial plan of action to budget for your dream home.
- Desired Home’s Price. Enter how much you expect to spend on your home in this field. Note that this is based on the principal amount on your loan and may not include other upfront fees or closing cost expenses.
- Expected Down Payment. Include how much you are able to deposit for a down payment on your home. Different loan types offer different down payment options, and although it’s recommended, it’s not always necessary to put a 20% down payment on your home. Be aware that a down payment of less than 20% will most likely mean needing to invest in private mortgage insurance (PMI). PMI adds an additional .5% to 1% based on your total loan value dispersed throughout your monthly payments. Our income qualification calculator does not factor in PMI.
- Expected Loan Term. This is the length of time over which you will repay your loan. Standard loan terms are typically issued in increments of 15 or 30 years. Choosing a 15-year loan term will require making more aggressive monthly payments, but save you thousands of dollars that would otherwise be paid in interest over the life of your loan. 30-year loan terms may be a more affordable option for you as they offer lower monthly payments throughout the life of your loan.
- Estimated Interest Rate. You can choose from two loan types to determine your interest rate. The first loan type is a fixed-rate loan, which offers a set fixed interest rate to be paid over the life of your loan. The second loan type is an adjustable-rate mortgage (ARM). ARMs have variable interest rates set at competitively lower rates during the initial period, making them an attractive option for homebuyers. Once the negotiated initial period ends, interest rates on an ARM enter the variance phase and fluctuate in alignment with market trends. Apart from choosing your loan type, you can put yourself in a better position financially by ensuring that your financial ducks are in a row before applying for your loan. Borrowers in a better financial standing present less risk to lenders and are able to benefit from more advantageous rates and terms. Borrowers who are assessed as being at a higher risk for defaulting on their loan compensate their lender by paying higher interest rates.
- Recurring debt payments. Other outstanding private consumer debts that you pay monthly are used to indicate your debt-to-income (DTI) ratio. This can include credit card debts, car payments, student loans, alimony and child support, or any other financial installment obligations. To qualify for a higher mortgage loan, your lender will look for a DTI of 28%. This means that the amount you spend on your mortgage will eat no more than 28% of your monthly income. There is flexibility here, but you will want to talk to your lender to see what’s possible.
Other homeownership expenses should be considered moving forwards, like property taxes, HOA fees, homeowner’s insurance, and closing costs that are usually bundled into your total loan amount.
How Can I Strengthen my Purchasing Power and Loan Approval Chances?
Your income matters, but it is not the only financial factor used to determine your credibility as a borrower. A combination of your debts owed and salary received limits what you can afford. If this calculator reveals that you are not financially ready to buy a home, use that information to create a financial plan of action to lower your consumer debts or increase your source(s) of income. Work on raising your credit score. Ensure that you have W2’s that support that you have a reliable stream of income. Ultimately, it’s all about the risk you pose to your lender as a borrower. The less risky you are perceived from defaulting on your loan, the more purchasing power you will have. Plus, you will also be able to get better rates and terms on your loan.
How Can The Home Loan Expert Help?
For over 15 years The Home Loan Expert has helped homeowners purchase their dream home by getting them the best deal on a loan. A mortgage income calculator is a great tool you can use to determine where you stand financially in relation to your purchasing power for a home. Speaking with a knowledgeable lending representative provides a lifeline to address your mortgage-related questions that can’t be answered using a calculator.
Since our team members come from the same communities we serve, we can provide a lending service that is personalized and familiar with our clients’ needs. Thanks to our in-house underwriting process, we can get you approved on a loan in as little as two weeks. Stop waiting and start planning! Give us a call at 866-221-1926 to speak with one of our savvy lending experts, whose mission is to get you the best deal possible on your loan. We can also be reached through our online chat service to find out how you can make your income work towards purchasing your dream home today.