Before approving you for a mortgage loan, lenders want to make sure that you have a high enough income to make your monthly mortgage payments. If all or some of your monthly income comes from a job, you'll have to provide copies of your paycheck stubs as proof of your income. Without these copies, lenders won't provide you with a mortgage loan.
When determining whether you are financially able to handle monthly mortgage payments, lenders will look at two key ratios that compare your debts to your gross monthly income, which is your income before taxes are taken out. The first, the front-end ratio, compares your total estimated mortgage payment -- including your principal, interest and taxes -- with your gross monthly income. Lenders want to work with borrowers whose mortgage payments equal no more than 28 percent of their gross monthly incomes. Lenders also consider your back-end ratio, which looks at the amount of your gross monthly income consumed by your total monthly debts, everything from minimum credit-card payments to mortgage- and auto-loan payments. Lenders want your total monthly debts to total no more than 36 percent of your gross monthly income.
Proving Your Income
Lenders rely on several documents to prove your gross monthly income. Paycheck stubs are a key document for most borrowers. When you apply for a mortgage loan, your lender will ask you to provide copies of at least your last two paycheck stubs as proof of your gross monthly income.
Paycheck stubs aren't the only proof of income that lenders require. Lenders will also ask for copies of such documents as your last two to three years of income-tax returns and last two months of checking and savings account statements. If you receive income from other sources -- such as alimony, legal settlements or rental payments -- your lender will ask for copies of papers documenting these income streams too.
There are cases in which lenders won't ask for paycheck slips. If you receive all of your income from rental real estate, for instance, you won't have paycheck stubs to show to lenders. You might make all of your income as a freelancer if you are a writer, consultant or other type of independent contractor. You, too, won't have paycheck stubs. To prove your income, you might have to send to your lender copies of your last two to three years of income-tax returns and copies of the last two years of 1099 forms that your clients sent you.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.