Rules around income requirements and income verification have tightened in the mortgage industry, and it is important for buyers to know what to expect from lenders. Here are five general guidelines about income for buyers to consider:
- Lenders look at gross income (income before taxes and other deductions) when trying to qualify buyers for a mortgage.
- Lenders must document the source of a buyer's income for most loans. Lenders will request two months or more of current pay check stubs from buyers.
- Lenders may or may not count 'extra' income depending on underwriting guidelines. 'Extra' income includes overtime pay, bonuses, special incentives, and other income that not regularly earned. Underwriting guidelines will determine what income can be counted and what income cannot be counted.
- Lenders may verify income against buyers' tax return. For this reason lenders will require permission from buyers to obtain tax returns that have been filed. This point can be really sticky for some buyers because of the large gap between paycheck income and tax return income. Self employed people taking large amounts of deductions can be seriously impacted by this comparison.
- Lenders have to compare income with expenses to determine debt to income ratio - a.k.a. DTI ratios. There are two DTI ratios lenders calculate for buyers. There is the front end ratio which only looks at the amount of monthly mortgage payment compared to the amount of monthly income. And the second calculation is the back end ratio which compares all monthly expense to monthly income.
UPDATE 08/26/14 - There are some loan programs available that require no documentation of income. They do require significant down payment (20% to 40% or more), and the interest rate tends to be higher due to the higher associated risk. Credit scores are still a consideration.
Buyers, please note that I am not a mortgage professional or lender, but I am a professional real estate broker working to educate you for your first purchase or next purchase. For more information on purchasing in metro Atlanta or other real estate related questions, please call 404 418 8092 or 404 246 3210. Thank you!
Office 404-418-8092 Cell 404-246-3210 Fax 404-991-3770