It won’t seem strange to most to know that we will be assessing your income situation when you apply for a home loan. The average person believes that it makes sense that we know you have the capacity to repay a long-term monthly obligation like a mortgage with reasonable amount of verifiable monthly income. There are however, a number of different things that most home buyers don’t understand about income qualifying for a mortgage. There are things we count and things we don’t count when considering your income and a few of them may surprise you!
Firstly, let’s talk about the income numbers we use and how they may apply to you. For most mortgage loan programs we will be using your gross income to establish your maximum qualifying ability. This means your income BEFORE taxes or other deductions are made. This makes absolutely no sense to most home buyers, particularly first time home buyers as they have yet to see or experience the tax benefits of home ownership. However, we will be using your gross pay figure for qualifying purposes.
If your income comes from self-employment, commission, bonus, seasonal, part-time or other potentially varying income types, we will be averaging your income; over a two year period of time in most cases.
In general terms, when it comes to income stability, we’re looking to show proof that you’ve had income for the prior two year period and to establish the likelihood that your income will continue for at least 3 years. Very common situations:
- Recent graduate has first job and doesn’t have a two-year history. We can use your new full-time, salaried or hourly income and show prior history through school transcripts. Just keep in mind the varying income types above.
- There was a layoff in the last 2 year period. If you have experienced an extended layoff in the last two years, we will need to establish a new pattern of stability of income. Typically, we can do this after a return to work or a new job with a 6-month history.
- Child support or spousal maintenance that just started or will cease within a 3-year time period. Good news, bad news here. We can use child support or spousal maintenance for qualifying in most cases if we can prove the last 3 months receipt. However, if the support will end in less than 3 years from your scheduled closing, we will not be able to use that income for general qualifying purposes.
- Cash income, non-reimbursed business expenses or other deductions on tax returns. There’s an old saying I picked up somewhere along the way and it goes like this, “If you don’t claim it, we can’t use it.” It’s really that simple. If you don’t claim cash income on a tax return or if you deduct true business expenses on a tax return that aren’t reimbursed to you, we can’t use the cash income or must deduct those expenses from your income for qualifying.
There are obviously a host of other considerations for income and varying responses to each unique situation. The above are simply a few very common income scenarios we encounter. If you have a specific income question you’d like an answer to, Ask Carrie. I would be happy to answer your question!
Watch for our next post on the #3 Qualifying Consideration – Cold, hard, CASH and where you can get it from.
Are you a first time home buyer and you’re interested in learning more about buying your first home in Minnesota? We offer a Free First Time Home Buyer Class every month. Our next class is scheduled for February 9th from 6:30-8PM at Cornerstone Mortgage in Burnsville. Our classes all promise to be no-hassle, no-pressure. Register online now for our First Time Home Buyer Class or call to register at 952-808-0042. This First Time Home Buyer Class is a must attend for anyone who is looking to buy their first home with a desire to be well educated about the home buying process before they begin. All first time home buyer class attendees will also receive a free copy of their consumer credit report upon request. Credit review is an important first step in the mortgage qualifying process.
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