When you apply for a mortgage or try to obtain a preapproval letter, the lender uses your total household income to determine the maximum amount of your loan. Generally, only your taxable income is considered for a home purchase, but an exception is made for guaranteed benefits received through the Social Security Administration.
Children's Social Security Basics
Children of retirees, disabled persons or who have a deceased parent vested in the Social Security program receive children's benefits from the SSA. A parent or guardian administers the payments as a representative payee. The monthly funds are intended to help cover the child's portion of housing costs, food and utilities. Leftover funds are then applied to other expenses, such as clothing and educational costs. This makes qualifying for a mortgage, or paying a portion of your monthly house note with children's benefits, an acceptable use of funds.
To establish your ability to pay for your home both now and in the future, your mortgage provider may assess the longevity of your benefits. For example, in 2012 the Federal Housing Administration adjusted its lending guidelines to require additional verification of Social Security funds. When you receive children's benefits, the most important addition states that the benefits need to continue for at least three years. If your child currently receives Social Security but is within three years of her eighteenth birthday, your loan application may be denied. The only exceptions to the age-related benefit termination occur if your child is disabled or remains in high school past this milestone birthday.
Nontaxable Income Rounding
Mortgage lenders look at a potential homeowner's gross income, or pre-tax income, to determine loan eligibility. Because Social Security benefits are nontaxable income, lenders "gross up" your monthly payment to make it comparable to taxable income -- typically by 25 percent. For example, if you currently receive $800 in children's benefits, you multiply $800 by 25 percent to arrive at a increase in income of $200. This means a total of $1,000 is used in your mortgage calculations.
After your household's income from all sources is calculated, the mortgage broker compares the tally to your monthly debt payments to determine your debt-to-income ratio, or DTI. Private lenders prefer a DTI ratio of 45 percent or less with your potential house payment incorporated into the calculation. If your household income equals $2,000 per month, your total debt payments need to be $900 or less. A car note of $250 and $100 in monthly credit card payments leaves $550 for your house note. When your DTI ratio is slightly over the threshold and keeps you from qualifying for a loan, ask if you qualify for FHA financing that carries a 50-percent DTI ratio maximum.
Ashley Mott has 12 years of small business management experience and a BSBA in accounting from Columbia. She is a full-time government and public safety reporter for Gannett.