If you're in the throes of purchasing a new home, it can be a stressful time. Endless meetings with potential lenders, gathering documents, and assessing your financial situation are all hallmarks of getting near the finish line and being handed your new keys. You may be wondering what assets can be considered for qualification on a loan, and what kind of income guidelines your lender will use during the pre-approval process. It's important to know some basics of qualification terms.
Your income is an important indicator of whether you'll be able to pay your mortgage, which is essentially what lenders want to know. However, there is more to the story than just what you earn. Lenders also look at how you earn it, such as through commission or bonuses that can be inconsistent over time. If a large chunk of your income comes from these kinds of earnings, your lender will want to see a longer period of consistent employment, such as two years, to get a clear picture of how your income stacks up over time. Different types of income that can be considered include salary, bonuses, dividend and interest income, and alimony or child support. Make sure you bring documentation supporting any and all income sources, including pay stubs and W-2s for the last two years.
All of your assets will be considered by your lender, including your checking and savings balances. Other assets that can be considered include retirement funds and the cash value of life insurance policies, investments such as stocks and bonds, and significant personal property such as vehicles.
Expenses Versus Income
Your lender will also want to know how your income stacks up against your expenses, also called your debt-to-income ratio. A good rule of thumb is to keep expenses that show up on your credit report, such as credit card balances, car payments, and student loans, under 45 percent of your total gross household income. Also, your mortgage payment, including property taxes and private mortgage insurance, shouldn't top 28 percent of your total household income.
Most lenders will require a down payment on your mortgage. You can pull these funds from several different places, including your checking and savings accounts, investment accounts, retirement accounts, and cash. If you decide to borrow against a retirement account, make sure you know any stipulations your retirement management company imposes. Many retirement accounts allow you to borrow against them for a home purchase, although this will increase your debt, and subsequently, your debt-to-income ratio, which will affect the amount you're approved to borrow. If you have money literally laying around your house, such as stashed in a closet or under your bed, be cautious when using it for a down payment. If you can document where you received it, you should be fine. However, if the deposit is a family gift intended for the down payment, you'll have to get a letter documenting the gift.
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