Income Myths – I Don’t Make Enough to Afford Homeownership

How much money do you need to be making in order to purchase a home of your own?

The truth is there’s no specific answer to this question. While it’s true that you do need to have a steady source of income in order to qualify for a mortgage, the amount of that income is surprisingly less important than other factors such as your debt-to-income ratio and your credit score. The bottom line is, depending on where you want to live, a monthly mortgage payment can end up being less than a monthly rent payment.

How can that be true?

A traditional mortgage typically consists of a loan, with payments spread out over 30 years. The home being purchased serves as collateral for the loan. In other words, the lender maintains an ownership claim on the home until you have paid off the money you borrowed from them for the purchase transaction. This facilitates risk mitigation for the lender, as they retain legal recourse to the funds extended to you in the event that you stop paying. Thus, a lender’s ‘trust’ in you is augmented by the ability to execute foreclosure proceedings if needed to recoup any lost funds.

So why doesn’t everyone switch from renting to owning?

Obviously there are many possible answers to this question, including high home purchase prices, rising mortgage interest rates, low for-sale inventory, etc. For the purposes of this article, however, we’ll focus on the buying transaction itself.

Buying a home is not an easy process. Even all-cash buyers need to compete with other buyers and engage in a weeks-long transaction process before they can take possession of the house. For those in need of a mortgage, there’s the added hurdle of qualifying and coming up with a sufficient down payment. It’s a transaction that calls for specialized, non-biased help and guidance from someone you can trust.

Fortunately, the U.S. Department of Housing and Urban Development facilitates free home buying advisory and education services nationwide through HUD Intermediary organizations. Here in Minnesota, the Minnesota Homeownership Center is the largest such intermediary in the state.

The Minnesota Homeownership Center provides these services via a network of professional homebuyer advisors and educators embedded in community-based organizations across the state. Here in the Twin Cities, providers include agencies such as Model Cities, Northside Residents Redevelopment Council, PRG, Project for Pride in Living, and Urban League Twin Cities. The Center certifies these homeownership advisors, maintains the homebuyer education curriculum, and certifies class instructors and educators. As advertised, these services are accessible and available to everyone, free of charge.

A homebuying advisor can sit down with you and create a customized road map of sorts for you to follow as you pursue ownership for yourself. To start the process, they’ll do a soft-pull on your credit in order to determine your ‘mortgage readiness.’ Mortgage readiness refers to how you would fare, today, if you applied for a mortgage. You might be ready to roll with no additional work needed. Or you might need to repair your credit in order to improve your credit score. You may even be ready to roll as is, with the opportunity to improve your credit score and secure a lower mortgage interest rate. An interest rate improvement of just 0.25 percent on a $300,000 mortgage, from 6 percent to 5.75 percent, will save you more than $17,000 over the 30-year life of the mortgage loan.

So how much income do you need in order to qualify for a mortgage loan and purchase a home of your own?

There’s no magic number. And a mortgage could even be cheaper than rent. The best way to explore this is to sit down with a professional homeownership advisor and have them show you what’s possible given your specific circumstances.

Homeownership is possible. We can show you how.