HOW LENDERS VIEW YOUR QUALIFYING INCOME


One of the most important aspects of qualifying for a mortgage is affordability. Lenders are required to determine whether or not a borrower can afford a new mortgage payment, taxes and insurance in addition to current credit obligations. Lenders compare your gross monthly income with qualifying income to arrive at this number. However, not all income can be used. That said, how do lenders calculate qualifying income?

Unless you’re recently discharged from military service or just out of college or trade school, you’ll need to document at least two years of full time employment. This is accomplished by providing your two most recent W2 forms. In addition, lenders will ask for your most recent pay check stubs covering 30 days. The pay check stub will show both gross pay as well as year to date earnings. Lenders will compare the gross pay and year to date earnings to look for consistency. If the numbers don’t quite match up, be prepared to provide an explanation. For example, you make $5,000 per month but a month is missing. The numbers don’t add up. If you can document the reason for the shortfall in pay such as a vacation, family leave or other event that caused you to miss work, the lender will typically accept that documentation.

For the self-employed borrower, you can also expect to provide your two most recent federal income tax returns as well as a year to date profit and loss statement. Again, there needs to be a two year history and there is no exception such as college or military service. Your income from year to year needs to be consistent and any large drop off from one year to the next will raise some eyebrows and if there is any significant drop, the loan application might be denied. Lenders will add the two years net income and divide by 24 (months) to arrive at a qualifying monthly income.

Any other income such as bonuses or commissions must have a two year history, be consistent and have a likelihood of continuance for the future. Part time income can also be used if there is a history and the lender determines the income is expected to continue into the future. If any sort of income cannot be sourced or is inconsistent cannot be used to help qualify.

For more information or questions about mortgage loans,
Please visit http://www.mhlmtg.com/ecamp/fhamiem_924

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