Forget down payment for now. When you plan to get a mortgage, one of the very first things to consider is your ability to repay this debt. That’s why, verification of income on all mortgages, stated income loans included, is an essential step to get approved for the mortgage.
Lenders primarily want to know if you have a steady and reliable income to support your monthly payments. When can a lender say that you are making enough to be able to afford your loan payments? How do you determine this income required for a mortgage?
Find the answer to the question below. Find lenders here, too.
Understanding Income and Mortgage
Stated income loans of yesteryears can attest to this. A decade ago, it was easy to make loans based on the borrower’s word that he/she is earning this much. The stamp of approval did not rely on any verification.
But that’s highly unlikely now. Stricter rules and policies are in place to ensure loans are safe for consumers and lenders. Today’s stated income loans, for example, may forgo tax returns, but alternative documentation like assets and bank statements will be verified.
Income’s importance in mortgage qualification can’t be emphasized enough. And how much you need in order to qualify is a combination of several factors.
Calculating Income Required for Mortgage
To determine the level of income you need to qualify for a mortgage, consider the following:
- Monthly housing expenses. This is what you spend on housing, e.g. mortgage payment — principal, interest, property taxes and homeowners insurance (one-twelfth), homeowners association fees — or rent.
- Monthly liabilities. This refers to your total monthly expenses, housing and other debt obligations such as car loans, student loans, alimony/child support, and payments on loans that you are a co-borrower to. Utilities are not included.
- Mortgage amount. The amount you need to borrow for your home loan.
- Mortgage rate. The interest that you’ll receive on your mortgage. If you are getting a fixed-rate mortgage, this won’t change throughout the life of the loan. For an adjustable-rate mortgage, the start rate will adjust periodically. You can get pre-approved to get a definite rate from the lender or shop for mortgage quotes for now here.
- Mortgage term. The length of time to pay off the loan. This affects the calculation of your monthly principal and interest payments.
There are online calculators that will crunch the numbers based on those variables.
Knowing Your DTI
Where does your current monthly income fit in all of this?
Lenders use debt-to-income ratio to measure your ability to comfortably take on the loan given your total monthly liabilities including housing costs as noted above and your gross monthly earnings.
To get this DTI, you’ll divide your monthly liabilities by your monthly income before taxes. Your DTI calculation may be different from that of lenders because not all sources of income may be qualified for mortgage purposes.
Nonetheless, your DTI ratio will be your guide in determining your capacity to afford a mortgage for now. Lenders and loan programs have varying standards for DTI ratios. Most recently, Fannie Mae has expanded its maximum allowable DTI ratio to 50%.
Qualifying and verifying income are two different processes and lenders are the best people to ask about their rules. Speak with one today.