Home Buyer Qualifying Income

In addition to metropolitan area prices, NAR Research estimated qualifying income for each metropolitan area in the first quarter of 2012. This article will review what qualifying income is and how we estimated it. How does calculated qualifying income for the median priced home compare to the income of potential buyers in your area?

Qualifying Income
When a home buyer seeks a mortgage for a home purchase, the lender will review the amount of income the potential buyer earns. Total gross income will be compared to the total housing payment to ensure that the home buyer is not spending more than a prudent percent of their income on housing. This should help ensure that lending is responsible and home ownership is sustainable (1).

What’s prudent? In its guidelines, the Department of Housing and Urban Development (HUD) suggests that total house payment not exceed 31 percent of gross income . HUD’s total house payment includes principle and interest but also includes payments for things such as mortgage insurance and homeowner’s insurance.

Because NAR’s analysis will exclude some factors that HUD includes in the total house payment, we use a more conservative ratio of 25 percent to create the metro area qualifying income. In other words, qualifying income is set to equal four times the calculated annual mortgage principal and interest payments (2).

Other Criteria Needed to Qualify
Having enough income relative to total house payment is just one factor that will be considered in a home buyer’s application for a mortgage. A lender will also consider a borrower’s other debts and the total paid to service those debts relative to income, as well as credit history, demonstrated ability to pay, financial reserves, and other factors.

All of these factors will be considered in the analysis done by a lender before approving a home buyer’s request for a mortgage.

However, the qualifying income analysis provides a rough snapshot of how affordable some markets are. Here are some highlights:

The full list of metro areas and qualifying incomes is available here.

(1) HUD Mortgage Credit Analysis: In its total house payment calculation, HUD includes many payments that are not included by NAR in the analysis such as real estate tax escrow payments, hazard or mortgage insurance, among others. Also HUD allows the payment to income ratio to exceed 31 percent if compensating factors are present. See the document for details, particularly section 4155.1 4.F.2.b Mortgage Payment Expense to Effective Income Ratio.

(2) At this time, prevailing mortgage rates are near and often under 4 percent, thus a 4 percent mortgage interest rate figure was used in calculations as a conservative estimate. Mortgage payments are estimated assuming a fully amortizing 30-year fixed rate mortgage. Down payment assumptions vary and are explicit in the analysis.