Getting a Mortgage: How Much Income Do You Really Need?

Dear Jeff,

People like to use the 28-32% figure as a rule of thumb, but you are an individual and you are buying a house, not a thumb. So here's a little inside information about how underwriters (even the computerized ones) look at the whole picture and where income fits in.

First, a look at a mortgage calculator may tell you that your desired house is out of your range. Don't let that stop you--it's just a guesstimate. Other factors matter as much as or even more than income. For example:

• Credit rating. Demonstrating that you have the ability to successfully manage debt can help an underwriter justify stretching your ratios a bit.
• Lack of payment shock. "Payment shock" is what's called the difference between what you are currently paying for housing and what your new payment would be. If your new payment would be $1,000 but you have been paying $1,500 a month for rent, that's an excellent indicator that you deserve a prime loan at the best interest rate.
• Increased income expectation. If you just graduated from college (hopefully law or medical school!), then you probably can expect a substantial increase in income and should expect to be able to manage a payment that's a little high now.
• Assets or reserves. If you will have money available after you make your down payment and take care of your closing costs, that amount is called "reserves." Underwriters take that amount, divide it by your monthly bills, and see how many months you could get by on your reserves if you had an income glitch (like a job loss). At least six months' reserves make you a golden person.
• Buying an energy-efficient home. Some lenders will approve a higher debt-to-income ratio if your home meets certain efficiency guidelines. Because they know your utility bills will be lower, you're allowed to spend more on your home.
• And finally, working for the government. If you don't have to pay into Social Security, what you don't pay is added to your qualifying income and can help you get more home.

So, when looking for a new home loan or refinance, if you want today's best rates, work with a loan pro who knows what he or she is doing. There are lots of ways to help you get the home you want, and the right person can help you do it.

Thanks for writing,

Liz