What do you know about mortgage income requirements?

What do you know about mortgage income requirements?

Mortgage lenders look at one main thing when reviewing a mortgage application - the likelihood of the borrower repaying the loan. Even if they have impeccable credit, borrowers must prove that their income is sufficient to cover the monthly mortgage payments.

There is a range of mortgages, from government-backed loans to the traditional fixed-rate type, all designed for people of varying incomes and financial means. However, there are some basic income criteria that borrowers should know before shopping for a mortgage.

What are the income requirements to qualify for a mortgage?

There is no single universal income requirement to qualify for a mortgage. "We're not limited to one type of borrower," says Houtan Hormozian, vice president at real estate brokerage Crestico Inc. "There is no standard for someone's income. Some college graduates qualify for a loan with only one payslip."

It all depends on the house price you want to buy and the type of loan you are applying for. But whether it's for a $1.2 million mansion or a $200,000 cottage, the lender won't take your word for it. To prove your finances to the lender, you must provide payslips, a tax return, or documentation of other sources of income from investments, royalties, or alimony payments. Tax returns are especially important when reporting income from a second job or for self-employed people.

In addition to what you make regularly, lenders constantly assess what you're getting out of - aka your expenses/debt, and then look at the relationship between the two, aka your debt-to-income ratio (more on that later - see "DTI Ratio to Qualify for a Loan") real estate" below) to see if you can swing an additional commitment. Based on that, they will calculate how much mortgage costs you can manage.

Minimum income guidelines for Fannie and Freddie

When underwriting conventional mortgages, most lenders follow the guidelines of Fannie Mae and Freddie Mac, two government-sponsored institutions that end up subsidizing or buying most home loans in the United States.

Fannie and Freddie's list of acceptable income documents is extensive but dynamic. For example, if you have a relationship with a bank that knows your history and thinks you're good for a loan, you may be able to get a mortgage without meeting all of the standard requirements. Fannie Mae recently revised its underwriting protocols to allow loan officers to take data from a loan applicant's financial and investment accounts into account if there needs to be more credit history or credit score information.

Fannie and Freddie's list of requirements mainly applies to conventional loans - those that private lenders guarantee. There are also programs for borrowers that differ from those standards, such as subsidized mortgages from government agencies like the Federal Housing Agency and the Department of Veterans Affairs.

For example, FHA loans have no specific income requirements. For these loans, lenders look at how much income is consumed by monthly bills, debt service, and your employment history. The borrower's salary plays a small role in FHA underwriting, although the lender will usually rate applicants with higher salaries as lower-risk borrowers.

What sources of income qualify for a mortgage?

You can use many different sources of income to qualify for a mortgage.

job income

Fannie Mae's guidelines allow the following types of business income to qualify for a mortgage:

Base salary (salary or hourly)

Bonus and overtime

Commission

Secondary work income (if you have more than one employer)

Methods of proving this income include:

Recent salaries and an IRS W-2 from the last year period for proof of basic income

Current salaries and an IRS W-2 from the most recent two-year period to prove bonus and overtime, commission, or secondary work income.

A completed Form 1005 to prove any form of income.

If you are self-employed or self-employed, you may qualify for a mortgage if you have tax returns that reflect self-employment earnings for the last 12 months. However, some applicants must have at least two years of payments to be considered for a mortgage. An independent or self-employed contractor may also be required to complete a Fannie Mae Cash Flow Analysis (Form 1084) or another similar form as part of their application.

Other forms of income

Non-employment income sources that lenders may consider include:

Dividend/interest income

retirement income

alimony

child support

border entered

Kings income

Schedule K-1 (income/distributions from partnerships, S corporations, and real estate)

Bail income

Trust income

Social Security payments

As with income from work, you will need documents proving this income. The required documents depend on the source of income. A brokerage statement may be an option for dividend income, while Social Security income can be proven with a benefits letter.

Debt-to-income ratio requirements

The debt-to-income ratio (DTI) measures your income compared to your debt payments. There are two types of DTI ratios, front end, and back end. Front-end ratios look only at potential housing payments, while back-end ratios represent all your debt payments.

To derive your DTI ratio, divide your monthly debt payments by your monthly income. For example, if you earn $4,000 monthly and your mortgage payment is $1,600, your forward DTI would be 40 percent. If your liabilities were now $2,500, your rear DTI would be 62.5 percent.

Like income requirements, a borrower's DTI ratio requirement is not fixed, according to Fannie Mae's guidelines. Several variables determine what a borrower's DTI should be. For example, Fannie Mae requires a borrower's DTI to be at most 36 percent of their stable monthly income. However, this maximum can increase to 45 percent if the borrower meets the credit score and reserve requirements.

Other factors are important when qualifying for a mortgage

In addition to your income and DTI ratio, lenders will also consider these factors when evaluating your application for a mortgage:

Credit score: Although you don't need perfect credit to qualify for a mortgage, a higher credit score (700+) generally gets you a lower interest rate.

Down Payment: The down payment requirement for traditional loans can be as low as 3 percent. But again, the more money you can shell out, the better.

Assets and Cash Reserves: Some lenders require you to have enough reserves to cover your mortgage payments after you've made your down payment. Aim for three to six months, even if it requires less than that, so you'll be prepared for an emergency or sudden cut in your income.