In January 2014, 427,000 Americans purchased homes. That’s 13,744 single family residences purchased daily, the most in five years. Few homebuyers pay entirely in cash, but mortgage lenders understandably want to make sure buyers can afford to pay them back. Proving they have the qualifying income for a home loan is a critical task for prospective homeowners.
When determining qualifying income for a home loan, how you earn money is as important as how much you bring in. Income that may vary like commissions and overtime likely won’t count towards qualifying income unless its consistency can be documented over two years. Income from second jobs held less than two years also will not count. Personal debt is the other major factor lenders consider when determining qualifying income for a home loan; a high debt to income ratio can lead to denial just like poor credit.
FHA and conventional mortgages use two calculations to determine the loan amount a perspective buyer qualifies for. First, the borrower’s qualifying monthly gross income is multiplied by 31 or 29 percent respectively; then multiplied again by either 43 or 41 percent. The borrower’s monthly debt is subtracted from the second figure to determine the debt to income ratio and the lesser amount of the two calculations is the borrower’s maximum monthly payment. Industry standards typically require the maximum monthly payment not exceed 28 percent of qualifying income to approve a home loan.
While your employment alone may not meet the debt to income ratio standard, it also may not be the only qualifying income you have. In addition to your work income, interest and dividends, capital gains and unemployment benefits are only a few of the many income sources that borrowers can include for lender consideration. Additionally, lenders often consider bonuses, overtime, short-term second jobs and other income sources that don’t count toward qualifying income as “compensating factors” that often allow for some debt to income ratio flexibility.
Being denied for a home loan is disappointing, but not necessarily the end of your dream of home ownership. Consider a different mortgage; federal loan programs like VA, USDA and FHA have higher debt to income ratio limits. Increasing the down payment or adding a co-borrower also can help secure that home loan approval. Additionally, community mortgage programs are available through both Fannie Mae and Freddie Mac with more flexible qualifying income standards
- Action Forex: US New Home Sales Jump to Five-Year High in January
- Investor Place: Study: Housing Market Should Rebound by 2018
- Demand Institute: American Communities & U.S. Housing Research
- Home Loan Learning Center: Qualifying for a Mortgage
- LocateHome.com: Home Mortgage Loan Qualifying Guidelines
- GoBankingRates.com: 4 Ways to Buy a House if You Don’t Meet Income Requirements Read more: Don't Meet Income Requirements? You Can Still Get a Mortgage
Based in Arlington, Texas, Michelle Diane has been writing business articles for six years. Her work has appeared in newspapers nationwide and on diverse digital outlets including Bounty, Breathe Again Magazine and LexisNexis. She is a University of Texas graduate and a presidential member of the National Society of Leadership.