The two ratios lenders care about
Lenders don't look at income in isolation. They look at debt-to-income (DTI) ratios — your monthly debt payments divided by your monthly gross income. Two flavors:
Front-end DTI (housing only)
Just the new mortgage payment (PITI: principal, interest, taxes, insurance) divided by income. Common limit: 28–31% on conventional, slightly higher on FHA.
Back-end DTI (all debt)
Mortgage payment plus all other monthly debts (car loans, student loans, credit-card minimums, child support) divided by income. Common limits:
- Conventional: 43–45% typical max, up to 50% with strong compensating factors.
- FHA: 43% typical max, up to 56.99% with manual underwriting.
- VA: 41% guideline, but flexible with strong residual income.
The reverse calculation
Most buyers want to know: "how much income to afford a $X home?" Here's the math:
Step 1: estimate the all-in monthly payment
For a $500,000 home with 10% down, 6.5% rate, 1.2% taxes, $150 insurance:
- Loan amount: $450,000
- P&I: $2,844
- Taxes: $500
- Insurance: $150
- PMI: $200
- Total PITI: $3,694/month
Step 2: divide by max DTI
For 43% back-end DTI with no other debts, you'd need:
$3,694 ÷ 0.43 = $8,600/month gross income (about $103,000/year).
If you have $500/month of other debts (car, student loans, credit cards), the math becomes:
($3,694 + $500) ÷ 0.43 = $9,754/month (about $117,000/year).
Income examples by home price
Quick reference assuming 10% down, 6.5% rate, 1.2% taxes, average insurance, $300/month other debts, 43% DTI:
- $300,000 home: ~$67,000/year income
- $400,000 home: ~$85,000/year income
- $500,000 home: ~$104,000/year income
- $600,000 home: ~$122,000/year income
- $750,000 home: ~$148,000/year income
- $1,000,000 home: ~$190,000/year income
These are rough — your actual qualifying income depends on rate, taxes, insurance, debts, and program. The Loan Estimate from a real lender is the actual answer.
What counts as qualifying income
W-2 employment
Most straightforward. Lenders use base salary + reliable overtime/bonus history (2-year average usually). Recent raises are typically usable.
Self-employed income
Calculated from net business income on tax returns, averaged over 2 years. Heavy write-offs reduce qualifying income — your accountant's tax minimization works against your mortgage qualification.
1099 / contract income
2-year average from 1099s and Schedule C.
Bonuses and commissions
2-year history typically required to count it. New roles with commission may have to wait.
Rental income
From investment properties, 75% of gross rents counts (accounting for vacancy/maintenance). Schedule E from tax returns.
Social Security, pension, retirement income
Counts at 100%, sometimes "grossed up" by 25% if non-taxable. Award letters required.
Child support / alimony
Counts if there's documentation showing 6+ months received and likelihood it'll continue 3+ years.
What doesn't count
- Gift money (helps with down payment, doesn't help with income).
- Income from a job you started last week.
- Anticipated raises or promotions.
- One-time bonuses without history.
- Cash income that doesn't show on tax returns.
Beyond income
Income is one factor. Down payment, credit, and reserves matter just as much:
- Higher down payment reduces the loan amount and DTI calculation.
- Better credit gets a lower rate, which lowers the payment, which lowers DTI.
- More reserves let underwriters approve borderline DTIs.
- Paying off small debts can make a meaningful DTI improvement.
Want a real number for your scenario?
A free pre-qualification gives you a real budget — based on your actual income, debts, and credit. Request a quote or talk to a loan officer.