Can I Use All of My Income?
There are very specific guidelines that must be followed in determining what income is allowable in qualifying for a home loan. For example there are a few situations that prevent you from utilizing your income.
The first is if you have been self-employed for less than two years. Generally speaking you must be able to document that your business has been established for at least two years and have a minimum of one full years’ tax return before you are able to use this income. This also includes people who are paid 1099 income (no income taxes deducted by your employer).
Other situations that potentially fall under the two-year rule are individuals who have commission pay or bonus pay as the basis for their income. If you have changed jobs and are in the same line of work with similar payment arrangements, sometimes underwriters will make exceptions.
For example: You are currently paid a straight base salary. You get an offer to go to work for XYZ Company, taking a 20% cut in base salary in exchange for commissions that historically for that position would give you a 25% to 30% raise effectively. The problem is that without any history of you receiving commission income, the lender will not allow any consideration for it and worse yet, qualify you off the smaller base salary which is 20% less than your old job.
My Monthly Bills
Monthly obligations that are counted against you when qualifying for a home loan include credit cards, student loans, (even if deferred), auto loans, personal demand loans, and any other revolving, or installment loans. For credit cards, the lender will count your “minimum monthly payment” when qualifying you for a loan.
Items that do not count against you are insurance, (medical, auto, life) utilities and other personal expenses. In addition, installment loans with fewer than 10 payments remaining can be excluded for qualification purposes.
This is an area that requires some care and education. Lenders will be looking to verify that you have in the bank the necessary funds to close the loan (cash needed at closing) and anywhere from one to two months reserves, depending on your credit and the individual program guidelines. Reserves are your estimated monthly housing payment.
Most conventional lenders require that any money being used for the purchase of a home be “seasoned” for at least one month. In other words, the money must have been present in the account for a minimum of 30 days. Large deposits into your account must be explained to an underwriter. If for instance, you sell a car for $4000 and deposit the money in your bank account. You will now be asked to provide documentation as to the source of this money, including a bill of sale and/or a copy of the check and deposit slip. In the event that someone pays you for this car in cash, there is no way to show a “paper trail” to the underwriter, and the money will not be allowed to be used towards the purchase of your home!
There are also very stringent requirements on gifts from relatives, such as how much you can receive and how to document the gifts.
The best advice is to talk with a mortgage professional well in advance of getting started to gain a clear direction on where to “stash” your money and how to document large deposits, gifts, and transfers between various accounts.
Last but not least, retirement accounts are reduced by 30% of the “vested balance” for qualifying purposes. These accounts can be used for the “reserves” mentioned earlier in this section.