Sunday, 2 August 2020

How Does Income Affect Qualifying For A Mortgage

Qualifying For A Mortgage

In this article, we're going to talk about how income affects qualifying for homeownership. Yes, if you're going to buy a house, you're gonna ask for $200,000, $300,000, $500,000. No matter what you asked for, the bank's going to ask you to show them the money. In this article, we are going to go over,

  1. How Income Matters
  2. The Rule Of Averaging 
  3. The Four Different Types Of Income
  4. Verification Of Employment
  5. Income Rules 



Let's get start

How Income Matters

  1. Banks Look At History 
  2. Habits And Behaviors
  3. Consistency

How does income matter when purchasing a home? The bank is looking for the continued income to pay back the mortgage. Since you're borrowing so much money, they want to see that you have a history of income, they want to see your income habits, how often you take time off, how often you take paid vacations, how consistent is your overtime, how consistent is your bonus. Through verifying your income, they will decide if they will qualify you for X amount to borrow. So once you provide all your income documentation. The second step once you bring in all your income, and you show the money, they are going to use the rule of averages.

The Rule Of Averaging 


When they're qualifying you, they're looking for an average income, they're looking for a two-year history, a two-year behavior, and a two-year consistency on how you receive income. So it doesn't matter a type of income, they're looking for history. For example, they're going to take the rule of averaging into consideration. For example, if you made $55,000 in 2018. $64,500 in 2017,  they're gonna add the numbers together, and divide it by 24 for the 2-year average, and that's what they're going to use as your income. But if you did take time off whatever the reason you took time off in 2018 while you made less money, most of the times you should make less money because we live in a country where we have inflation, so every year you should make more than the year before or the same amount. So if there is a decrease, make sure you have a good reason, you don't want them to take the lower average, you want to use the higher average, so the only way they're able to do so is having explanation, but if you don't, they're gonna average it out. Once they average out your income, now they have to apply it to against what debt you have. 

Of course, before we do that, we have to learn the types of income the banks wanted to use to average.

The Four Different Types Of Income

  1. Rental Income
  2. Self-employed Income
  3. Fixed income
  4. Wage Earners


Let's break it down

1. Rental Income


Rental income, of course, this is where it gets sticky with investors, and also people who are landlords. Most likely, a lot of landlords don't put the complete true rent receive, but, of course, if you're trying to buy more properties you need to show income because if you show a loss they count it as a monthly debt. For example, you would have to use your full gross rent income, minus your cost, your mortgage payment tax insurance, any other cost that is on your schedule "E', and that will be your net income. For example, if you gross $4,000, but your monthly cost is $3,000, you would have $1,000 in monthly income. But for example, your rent was $4,000 you're receiving, but the cost was $5,000 you would be negative $1,000 a month. Most of the times, most landlords, and most investors, they go with the negative record because they're trying to pay the lease amount in taxes, but when you do so it affects you qualifying because now you have another little debt or liability instead of income if you claim a negative. So that's how rental income works.

2. Self-employed Income


If you're self-employed you can still purchase a home, but remember when you're buying self-employed, you're either dodging Uncle Sam, or you're dodging interest rates. If you're dodging Uncle Sam, you can't dodge a higher interest rate, if you're dodging a higher interest rate, then you must pay Uncle Sam. So it's one or the other. How self-employed works it's gonna be your yearly gross income, minus, overhead, you can add back business miles, and depreciation, subtract food, and entertainment, that would be your income. But, of course, if you have an S corp, or AC Corp, or a limited liability. I recommend you talk to a lender before you go ahead. This is the basic foundation of self-employed.

3. Fixed income


Fixed income - we're talking about alimony, child support, social security, pensions, and permanent disability. Here's the key secret with alimony and child support. Since it is court-ordered so when it is court-ordered, for example, if you're receiving $4,000 a month as court-ordered, but if you have proof that you're receiving the $4,000 a month for 12 months you can use the income. But even if it's court-ordered, and there's no proof, you cannot use the income. But let's say it's $4,000 a month, but you have a history receiving $2,000 even those court-ordered you could only use $2,000 a month. Check this out, if it's court orders $4,000, but your ex-spouse is gonna give you $5,000, and you couldn't have all the histories you want, 12-month history, six-month history. The max you can use is the $4,000, they're using the worst-case scenario. 

  • The key to Social Security is there's taxable and non-taxable 
If it's non-taxable you can adjust it up to 125% on conventional loans, and 115% on VA or FHA loan. The key with social security they're going to ask for the reward letter, and two months' bank statement showing that you're receiving the social security income.

  • Pension  
Make sure you have your pension letters with a pension, they want to hit 3-year history showing that you're still gonna receive your pension for 3 more years, it should be in your pension paperwork. If you're receiving a pension, and for a spouse, because a spouse passes away, the same thing, you can still use the income if you have your pension information showing you're still going to receive the pension.

  • Permanent disability
If there's a reward letter with a permanent disability just like Social Security, you can gross it up between 125% on conventional loans, and 115% on VA or FHA loans. If you're taking time off because you're having pregnancy as long as you're still, or any injuries if you're receiving disability because you're taking time off because you had a baby, as long as you have a history, that you're still receiving the income, they have to use the income that you're receiving at that moment. If there is a pay cut, they can use the pay cut income. But if you're getting the same income, that you would get paid, if you were still working, they can use that income. So ladies if you have a baby, don't be afraid, you can still qualify for homeownership.

Wage Earners


If you're a wage earner it's pretty simple, the rule of averaging doesn't affect you only when it comes to commission, overtime, and bonus. Of course, every year as you get a new pay increase on your salary, or hourly, they can use the new income, but they're gonna average out your overtime, your bonus, and your commission. So you have to have a 2-year history that you're receiving overtime, bonus, or commission, to use the income. That they would use the rule of averages. When they're qualifying for you for homeownership, you need to ask your lender, are you using overtime, bonus, or commission to qualify?. If they are, you must have a 2-year history, that can really drive down your income especially a lot of you guys out there who took a pay cut because you know your new job guarantees you more overtime or bonus. But if you don't have a two-year history even though it's guaranteed, you can't use the income. So that's how to wage earner works. With wage earners most of the time, there is a golden ticket. Wage earner income is a lot different than fixed, self-employed, and rent because those incomes are very black and white it's on your tax returns or it's on the reward letter. With wage earners, the lenders order something called the "verification of employment". 

Verification Of Employment


There are two ways to do the verification employment, one, which is the VOE that they send out to your employer. Number two. Your salary key. A lot of companies now are going the salary key. The one thing about the salary key that I don't like that you must find out from your employer, do they break down over time or bonus?. A lot of salary keys they lump some the overtime or bonus. With verification of employment, they're going to send you that VOE form, so if you're going to buy a house, you need to let your employer know, hey, I'm buying a house, I need you to fill out this form. This form can be the maker breaker of your loan especially if you have a lot of commission, a lot of overtime, a lot of bonus, if it's the majority of your income, this form needs to get filled out correctly for you to use the income. Most importantly with overtime or bonus, they must say, yes, overtime or bonus is continual. A lot of employers right now are not filling that out, so make sure your employer puts the comments company policy, we cannot put "yes" to this question. So as long as that information is filled out, the lender can still use your bonus or overtime.

That is the golden ticket I see for wage earners, the thing that breaks the loan or makes a loan is this VOE or stalls out the loan is this verification employment. So make sure everyone at your company in the HR department knows you're buying a house. This form is so important, the reason why it's so important is that it dictates your history, your habit, and your consistency of qualifying for homeownership.

Income Rules 

  • Rule # 1. Commission, Bonus, and Overtime Income
You need a proof of two-year history, otherwise, you can't use commission, overtime, or bonus, to qualify from homeownership. You can only use your base income at your job. If you did take a job, and most of the income relies on bonus, overtime, or commission, you do need a 2- year history. So be careful if you're transitioning jobs, and your new job is heavily on overtime, bonus, or commission, and you didn't have it in the past.

  • Rule # 2. Wage Earner To Self-employed 
Congratulations you decided you want to take control of your finances. The rule of that is you need a 12-month history of being self-employed before you can use yourself employed income. Your self-employed income must match what you made on w-2 or more if you want to use that income.

  • Rule # 3. Self-employment To W2 Only Need 1 Month Pay Stub
If you're going from self-employed to w2, you only need one-month pay stubs, because wage earner income is guaranteed, you just need a one-month history.

  • Rule # 4. If you're a recent graduate, you can show a diploma or transcripts from your college or your trade school, for example, (nurse or truck driver). If you're in a technical position as long as you have the proof of the degree, and the transcripts. That covers your two-year work history, then you can use the income.

  • Rule # 5. Employment Gaps
If you have employment gaps, as long as the employment gap is under six months old, you can use the income to qualify. If your gap is over six months old, they do require that you've been back at work for twelve months, unless there was an injury, a death, or casualty, in your personal life, Then the underwriters from the bank can take that into consideration.

  • Rule # 6. Using Bonus Or Overtime
f your previous job did not have a bonus or overtime, you cannot use bonuses and overtime on your new job. You need a two-year history of bonus overtime you used the bonus and overtime income. If your prior job has six months of bonus in overtime, and the recent job you've been there for a year or six months, then you can use the bonus or overtime. What the banks are looking at is 2-year history. So visit your new job or old job as long as you have a 24-month history, you can use a bonus or overtime like rule number one.

  • Rule # 7. Seasonal And Part-Time Jobs
If you have a seasonal job or a part-time job, and you've had it for over two years, you can use the seasonal and part-time jobs to qualify for a homeowner.

  • Rule # 8. Job
If you've had two jobs for two years, and you're using both jobs to qualify for homeownership, you can use both jobs. If you've had gaps in employment on either job, most banks will allow is a one-month gap. So if you're trying to use both jobs to qualify, you need a two-year history with less, or one month gap to qualify for homeownership.

  • Rule # 9. Temp Agencies And Union Jobs
Just like the other rules, temp agencies, and union jobs, there cannot be a six-month gap. As long as there's no six-month gap, you can use temp agencies and union jobs to qualify for homeownership if that temp agency or Union job that you are currently working at is the highest and best income, the banks would use the rule of averaging to qualify you for your home.



Those are the 9 rules you need to know when you're trying to figure out should your income qualify or not for homeownership. 



Conclusion

After you understand the rules, now that we know the four types of jobs, now that we know the rule of averages, and how income affects qualifying for homeownership, here's a tip that real estate agents and lenders use to qualify you for homeownership. If you know your income, and you know your monthly liabilities, what you do is you take your monthly gross income, and you divide it by 2. That is the max your mortgage payment, taxes, and insurance, and all your credit debt can add up to. If you make less than that amount, then you would have to subtract out, lower the rent, out of cosigner, or increase a down payment to qualify from homeownership

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