What Income Do I Need for a $200,000 Mortgage?

Can I Afford a $200,000 Mortgage?

When you apply for a mortgage, your lender will look closely at your income and debts. Your debt-to-income ratio (DTI) represents how much of your gross monthly income is currently covering debt payments. It's calculated by dividing your total debt by your income.

Example: If you earn $5,500 a month and your total debt payments equal $1,925, your DTI is 35% (1,925 ÷ 5,500 = 0.35).

Front-End vs. Back-End DTI

Mortgage lenders generally calculate two types of DTI:

• Front-end DTI: Focuses specifically on your housing costs, which includes mortgage payments, homeowners insurance and property taxes.
• Back-end DTI: Considers your housing costs and all other monthly debt payments, such as credit cards and loans.

What DTI Do I Need for a House?

Every lender is different, but most prefer a DTI below 43%. The 28/36 rule can be a helpful benchmark. It suggests keeping your mortgage payment, including principal, interest, taxes and insurance, at or below 28% of your gross monthly income. You'll also want to keep your back-end DTI below 36%.

Learn more: How Much House Can I Afford Calculator

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What Other Factors Do Lenders Look At?

On top of your income and expenses, your mortgage lender will also consider the following factors when making a lending decision:

• Your credit score and history: Lenders want reassurance that you'll pay back your home loan as promised. They'll look at your credit score and credit history to determine how risky it is to lend you money. If, for example, you have a track record of late payments, that could affect your eligibility and interest rate.
• Your down payment amount: It's possible to secure a conventional loan with a down payment as low as 3%, but putting down more allows you to borrow less—which will reduce your monthly payment. If you put down less than 20% or get a government-backed mortgage, you'll likely be required to purchase mortgage insurance as well, which will increase your monthly payments.
• Your savings and assets: Be prepared to provide statements for any bank accounts or investments accounts you have. That includes checking and savings accounts, 401(k)s, individual retirement accounts (IRAs) and brokerage accounts. Lenders want to see this to ensure that you can afford your new loan payment, down payment and closing costs.
• The property's market value: The lender will arrange a home appraisal to verify that the loan amount doesn't exceed the value of the home. If the appraisal is lower than your offer, you may need to cover the gap with cash savings or negotiate a lower price with the seller.

What Are Additional Costs Associated With Buying a Home?

The cost of buying a home goes beyond the sale price and your down payment. It also includes closing costs, which generally range anywhere from 2% to 5% of the sale price. Closing costs can include:

• A loan origination fee
• Recording fees
• Home inspection fees
• Appraisal fees
• Mortgage points
• Title search services
• Title insurance
• Prepayment of your homeowners insurance premium, mortgage insurance premium and property taxes (most lenders hold this money in an escrow account)
• Your real estate agent's commission fee, though the seller may agree to contribute

Tip: You'll also want to consider moving costs and the ongoing costs of owning a home. That can include everything from routine maintenance to homeowners association fees.

Learn more: Homeowner Expenses Beyond Your Mortgage

How Does Credit Affect Your Mortgage Affordability?

Your credit health is one of the most important factors a mortgage lender will consider. It can determine your interest rate and the fees you pay—and in some cases, it could prevent you from getting approved altogether.

Applicants with higher credit scores are generally offered lower mortgage rates (and vice versa). That can translate to a lower monthly payment and significant savings over the life of your home loan. You'll likely need a minimum credit score of 620 to qualify for a conventional mortgage, though some government-backed mortgages allow for scores as low as 500. If you're applying for a mortgage with bad credit, you might be required to make a larger down payment or add a cosigner to your application.

Learn more: What Credit Score Do I Need to Buy a House?

How to Prepare to Buy a House

If buying a home is on your bucket list, you can take the following steps to afford a $200,000 mortgage payment:

• Save for your down payment and closing costs. Having these funds on hand can show lenders that you're financially ready to be a homeowner. Consider setting a monthly savings target and keeping this money in a high-yield savings account or certificate of deposit (CD). For a $200,000 mortgage, a 3% to 20% down payment would range from $6,000 to $40,000.
• Improve your credit. You can do this by paying your bills on time, reducing your debts and bringing past-due accounts into good standing. These are simple steps that can help improve your credit score before applying for a mortgage.
• Research lenders and real estate agents. Ask for recommendations from friends and family members, read online reviews and shop around to find the best lender and agent for your needs. Working with the right real estate professionals can make for a smoother experience. It could also save you money if it results in a lower mortgage rate or sale price.
• Get preapproved. It's smart to get preapproved with a lender before you start house hunting. After you submit some basic financial information and agree to a credit check, your lender can issue you a preapproval letter that outlines your estimated loan amount, interest rate and loan term. You can use that to make an offer on a home when you're ready.

The Bottom Line

Whether you earn enough to afford a $200,000 mortgage payment depends on many factors, including your down payment amount and interest rate. Going into the homebuying process with a healthy savings account and strong credit can improve your odds of securing a competitive rate. To get started, you can get your FICO^® Score^Θ and credit report for free from Experian.