Regular Income CalculationsFor salary and wage earners, a lending partner will want to see current pay stubs as well as W-2 tax forms for the past two years. If you've recently had a change in pay, such as a raise, you'll also need to get a statement from your boss confirming that the change is permanent.
Example Required Income Levels at Various Home Loan Amounts
| Home Price | Down Payment | Annual Income |
|---|
| $150,000 | $30,000 | $40,107.97 |
| $200,000 | $40,000 | $49,310.63 |
| $250,000 | $50,000 | $58,513.28 |
| $300,000 | $60,000 | $67,715.94 |
Approaching a bank for a home loan means being prepared. An attractive credit history, sufficient income to cover monthly payments, and a sizeable down payment will all count in your favor when it comes to getting an approval. Ultimately, banks want to minimize the risk they take on with each new borrower.
Banks use gross income, not taxable income, to qualify borrowers because it's verifiable.
Your tax documents give lenders information about your various types and sources of income and tell them how much is eligible toward your mortgage application. Any income that you report on your mortgage application that isn't reported in your tax returns usually can't be used to qualify.
Not usually, but there is an exceptionBorrowers can use personal loans for all kinds of purposes, but can the Internal Revenue Service (IRS) treat loans like income and tax them? The answer is no, with one significant exception: Personal loans are not considered income for the borrower unless the loan is forgiven.
Hourly Employees: To calculate the income of an employee paid on an hourly basis, underwriters use the average number of hours worked per pay period and multiply it by the hourly rate. Based on that number, they will arrive at a monthly income amount.
For example, in most cases, lenders prefer to see a debt-to-income ratio smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage. To get a qualified mortgage, your maximum debt-to-income ratio should be no higher than 43%.
Work with a mortgage professional, and involve your accountant as well. You can change the way you write off your business expenses, and the amount of taxable income you show. Alternatively, you can amend previous tax returns to show higher income from the past.
Generally, it's a good idea to fully pay off your credit card debt before applying for a real estate loan. This is because of something known as your debt-to-income ratio (D.T.I.), which is one of the many factors that lenders review before approving you for a mortgage.
The usual rule of thumb is that you can afford a mortgage two to 2.5 times your annual income. That's a $120,000 to $150,000 mortgage at $60,000. You also have to be able to afford the monthly mortgage payments, however. You can cover a $1,400 monthly PITI housing payment if your monthly income is $5,000.
How much should you be spending on a mortgage? According to Brown, you should spend between 28% to 36% of your take-home income on your housing payment. If you make $70,000 a year, your monthly take-home pay, including tax deductions, will be approximately $4,328.
How much do I need to earn to get a mortgage of £350 000?
| Income | 3 Times Income | 5 Times Income |
|---|
| £70,000 | £210,000 | £350,000 |
| £75,000 | £225,000 | £375,000 |
| £80,000 | £240,000 | £400,000 |
| £85,000 | £255,000 | £425,000 |
2 years of employment isn't always needed to buy a houseA strong employment history proves you have a steady income and ability to make loan payments. But not everyone has a long employment history. If you find a lender willing to work with you, you can buy a house without much — or any — job history.
The mortgage provider may contact your employer to confirm your earnings but this isn't normally necessary unless you've only started a new job recently. If you're been working in the same job for a while, they only need to see evidence of your salary slips for the last 3-6 mths.
Take a homebuyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28% of gross income is $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.)
Mortgage lenders need bank statements to make sure you can afford the down payment and closing costs, as well as your monthly mortgage payment. Lenders use your bank statements to verify the amount you have saved and the source of that money.
Many borrowers won't have any trouble providing proof of their income to get a mortgage, while others, such as freelancers or self-employed people, may struggle. The more evidence provided, the better the mortgage deal can be.
Lenders might be 'put off' if you have unpaid debt, old credit cards, loans, a poor credit score, multiple home addresses, and financial ties to other people that have a weak credit score. For example, if you have taken out a payday loan in the past 6 years it will show up on your credit file.
