Planning to buy your first home? Do you have questions about the income requirements and criteria for first-time home buyers seeking a mortgage? You’re in the right place! Below, we’ve provided an overview of the basic income requirements and qualifications for first-time buyers seeking a mortgage loan in 2022.
In short: One of the most important requirements for loan applicants is the debt-to-income (DTI) ratio. This is a comparison between the amount of money you earn each month, and the amount spent to cover your recurring debts. In 2022, many mortgage lenders limit borrowers to an overall DTI ratio no higher than 50%. More to follow on that!
Income Requirements for First-Time Home Buyers
When you apply for a mortgage loan, the bank, credit union, or lender will review many aspects of your financial situation. (And for obvious reasons.) They’ll mostly focus on your income, assets, debts and credit history. This is true for first-time and repeat home buyers alike.
Lenders do this to determine whether or not you’re a good candidate for a home loan. They also do it to assess the likelihood that you’ll repay the debt, and to measure risk. In short, lenders 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 requirements for verifying income, assets and debts. So the rules and qualification criteria can vary to some degree.
Despite these differences, 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.
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 debts can include auto loans, credit cards, student and personal loans, along with 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 debt-to-income ratio no higher than 43%. This means 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.”
The DTI Limit Is Often Set at 45% – 50%
While the income requirements for first-time home buyers can vary, many lenders set the bar somewhere between 45% and 50% for the total or “back-end” DTI ratio.
This applies to conventional and government-backed mortgage loans alike. But again, the exact requirements can vary slightly among the different loan types.
So, 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.
The goal is to ensure that the borrower has the financial capacity to make the monthly mortgage payments, along with all of their other recurring debts. So you might 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.
A Thorough Review of Financial Documents
When you apply for a home loan, the lender will request a variety of additional documents (aside from the application). These include, but are not limited to, the following items:
- 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 seeking a mortgage, the tax records and bank statements are the most important documents. 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 (Experian, TransUnion and Equifax). The balances are usually reported as well. So mortgage lenders can use these reports and related documents to determine how much 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.
A Recap of the Most Important Points
- The minimum required income for a first-time home buyer can vary from one mortgage program to the next, and also from one lender 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 2022, most lenders set the limit somewhere around 45% to 50%, as far as the total DTI ratio. But they might go above that threshold in rare cases.
- Lenders use a variety of financial documents to determine if a borrower meets their minimum income requirements, including tax records and bank statements.
Disclaimer: This article is intended for a general audience and might not apply to all lending situations. To find out if they meet the basic income criteria for a specific loan program, first-time home buyers should speak to a loan officer or mortgage broker.