Saturday, May 10, 2014 - Article by: Justin Fitzhugh - Nations Lending Corporation -
In a previous post, I discussed the fact that your annual gross income is a vital factor when a lender is evaluating your mortgage application. Your annual gross income, or monthly gross income (GMI), will help us lenders determine your housing and debt ratios. If these ratios exceed the maximum accepted threshold, you will be limited or unable to qualify for certain home loan products. But the income part of the mortgage approval decision goes beyond your current gross income, and we need to look into the stability of your income. Here I discuss the impact of your source of income in the qualification of the mortgage application.
As lenders, we need to determine your ability to make future mortgage payments, and hence we look at your wage history. We try to gauge the stability of your income, and we want to determine the pattern of increasing/decreasing income. You job history will be very important, and well ask for W2s, 1099s, and/or tax returns to verify your employment history for the last two years.
Ideally, we want to see a pattern of stable income, and if your sources of income are alimony, child support, or anything that has an end date attached to it, your application will demand we take a closer look. Commonly, sources of income that may end in the future will need to have an end date beyond 3 to 5 years to be considered as a source of income. If you have been receiving alimony or child support payments for less than 12 months, we will consider this a source of income as long as this income is less than 30% of your total income.
If you changed jobs during the 24 months previous to your application, you will need to submit a verification of employment to established continuous work history; and you changed your line of work, expect the application to get a bit more complicated.
If you had a non-employed or unemployment period within two years prior to your application, gap in employment, youll need to explain in writing why this happened. And if you show a pattern of decreasing earnings, you will be asked to explain in writing why this happened. If you are wondering whether you have to submit a letter explaining why you are making more money than the previous year (lol), dont worry. If all of your application variables are in line, youll get an approved mortgage rather than a golden star in your forehead :)
Salaried applicants can use bonuses, overtime, and commissions to supplement their income figures. But in this case, you will need to proof these type of income is likely to continue. The best way to document overtime, commissions, and bonus income is to show your pay stubs for the last two years.
If more than 25% of your income is from commissions, you will be considered a self employed individual. In this case, we will require your income taxes for the last two years in order to verify and calculate your average income for this period of time.
If you have an existing mortgage from a rental property, we may ask for lease contracts to calculate the propertys income. Another alternative may be to ask you for past tax returns to determine your cash flow.
The most complex cases are when you are a self employed individual. Self employed individuals who have drastic changes in their incomes from one year to the next, will need large reserves of cash to qualify. But this is not a general rule, and each case is different. If you are self employed individual, be ready to provide income taxes for the last few years. The best thing you can do, is to work with mortgage specialist that specializes in self employed borrowers. Worst case scenario, if you can afford a mortgage, there are programs specially created for you, low or limited documentation loans (low-doc loans), no income-no assets loan programs (NINA). Given the high level of risk, these programs are available at the expense of high interest rates.
Can you imagine lending money to a person you dont know? I bet youd say NO... it is the same for lenders. You may think of a lender as a building, because it is a company. But we get our funding from investors who are people like you, people who worked to get their money, and they are putting this money to work for them by lending it to people who want to use it for some reason. In the case of residential mortgage lenders, homebuyers like you may want to use it to finance your home or to invest in a property. Either way, it is the job of the lender to ensure the borrower has the ability to pay. So when you apply for a mortgage, be patient and be ready to help us determine who you are as a borrower.
The Consumer Financial Protection Bureau provides a list of documents we may request when you apply for a home loan: http://www.consumerfinance.gov/askcfpb/150/what-documents-will-my-lender-or-mortgage-broker-request-after-i-have-found-the-right-loan-for-me.html
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