Planning to buy your first home in 2018? Do you have questions about the income requirements and limits for first-time home buyers seeking a mortgage loan? If so, keep reading. Here’s an overview of the basic income requirements and qualifications for first-time buyers seeking a mortgage loan in 2018.
Income Requirements for First-Time Home Buyers
When you apply for a mortgage loan, the bank, credit union, or mortgage company will review all aspects of your financial situation. They will look at your income, assets, debts and credit history.
They do this to make sure you are a good candidate for a home loan, and to measure the likelihood that you will repay the debt. They also want to make sure you have sufficient income to cover your monthly mortgage payments.
The specific income requirements for first-time home buyers can vary from one mortgage program to the next. Additionally, individual lenders have their own unique requirements for verifying and documenting income. So the rules and qualifications can vary.
With that being said, nearly every mortgage program uses the debt-to-income ratio as a qualification measure. So let’s talk about this important requirement for first-time home buyers in 2018.
Definition: The debt-to-income (DTI) ratio is simply a comparison between the amount of money a person earns each month, and the amount he or she spends to cover recurring debts. These recurring debts can include such things as auto loans, credit cards, student and personal loans, and even the mortgage payment itself. Income requirements for first-time home buyers seeking a mortgage loan are typically expressed in the form of the DTI, which is a percentage.
For example, the FHA loan program generally requires borrowers to have a total deb-to-income ratio no higher than 43%. This means that the home buyer’s combined debts — including the mortgage payments — should use no more than 43% of gross monthly income. (But they also allow higher debt ratios in some cases, for borrowers with “compensating factors.”)
Bar Is Frequently Set at 45% - 50% DTI
While the income requirements for first-time home buyers can vary, most lenders today set the bar somewhere between 45% and 50% for the total or “back-end” DTI ratio. This means that if a person’s total recurring debts account for more than 50% of income, he or she might have trouble qualifying for a home loan.
But again, the rules can vary from one program to the next, and also among different lenders.
The main objective here is to ensure that the person taking on the loan has the financial capacity to make the monthly mortgage payments, along with all other recurring debts. So you can think of it as a kind of protective measure for borrower and lender alike.
So, how do mortgage lenders enforce the income requirements for first-time home buyers? How do they actually find out how much money you earn, and how much you spend on your debts? They do this by looking at a variety of financial documents, as explained in the next section.
Related: Mortgage requirements for home buyers
A Thorough Review of Financial Documents
When you apply for a home loan, the lender will request a variety of additional documents. These include, but are not limited to, the following:
- Tax returns, usually for the last couple of years
- W-2 forms, usually for the last couple of years
- Bank statements for the last few months for all accounts the borrower holds
- Pay stubs, usually for the last two months
- Verification of employment from the borrower’s employer (in some cases)
- Credit reports from at least two of the credit reporting bureaus
This is just a partial list of documents that most mortgage lenders will request. You might have to provide additional paperwork as well, depending on the type of home loan you use and other factors.
When it comes to the income requirements for first-time home buyers, the tax records and bank statements are the most important documents. Mortgage lenders use these to determine how much a person earns each month, looking back a couple of years in most cases.
As for verifying a person’s debts, this can be done using credit reports and other documents. Credit reports are essentially a record of your financial activity and borrowing history. Nearly every time you take out a loan or open a credit account, it gets reported to the credit reporting bureaus. The balances are usually reported as well. So mortgage lenders can use credit reports and related documents to determine how much total recurring debt you have.
Based on all of this documentation and research, the mortgage lender will be able to determine if you, as a first-time home buyer, meet their minimum income requirements for mortgage approval.
Here’s a recap of key points covered in this article:
- The minimum required income for a first-time home buyer will vary from one mortgage program to the next.
- Banks and mortgage lenders use the debt-to-income ratio to determine if a person is qualified for a home loan.
- In 2018, most lenders will set the limit somewhere around 45% to 50%, as far as the total DTI ratio.
- Lenders use a variety of financial documents to determine if a borrower meets their minimum income requirements, including tax records and bank statements.
Disclaimer: The mortgage lending process can vary from one borrower to the next, based on a number of factors. So your situation could differ from the examples presented above. This article is intended for a general audience and might not apply to all situations. To find out if they meet the minimum income requirements for a specific mortgage program, first-time home buyers should speak to a loan officer or mortgage broker.