When you apply for a mortgage loan, that application goes to mortgage underwriting. This step is essential to verifying income to determine whether that loan is approved or not.
Because of the large amount of money involved, this step is quite involved and requires a lot of documentation.
Because of the large amount of money involved, this step is quite involved and requires a lot of documentation.
Income Requirements for a Mortgage Loan
The question is not so much about how much income you need to qualify for a mortgage loan, but how much of your income will be designated for the mortgage repayment.
There are two Debt-to-Income (DTI) ratios lenders review. The front end ratio is the percentage of your monthly income spent on housing expenses, such as the mortgage principle and interest payments, mortgage insurance, homeowner’s insurance, property taxes, and so on.
The back end ratio includes all the housing expenses listed above and all your other monthly expenses. For example, credit cards and student loans, auto and personal loans, spousal maintenance, child support, and alimony payments.
There are two Debt-to-Income (DTI) ratios lenders review. The front end ratio is the percentage of your monthly income spent on housing expenses, such as the mortgage principle and interest payments, mortgage insurance, homeowner’s insurance, property taxes, and so on.
The back end ratio includes all the housing expenses listed above and all your other monthly expenses. For example, credit cards and student loans, auto and personal loans, spousal maintenance, child support, and alimony payments.
What Underwriters Look for When Verifying Your Income
The majority of underwriters follow the guidelines set forth by Freddie Mac and Fannie Mae, but standards can vary.
You’ll need to provide pay stubs for the last two to three months, W-2 forms, income tax returns for the last two years, and bank statements to verify the funds needed to close as well as any reserve monies.
If your income is dependent on commissions and bonuses, the verification process is stricter.
To consider commissions and bonuses as part of your income, underwriters want to see two years’ worth of commission and bonus income statements.
For the self-employed, the income requirements are even more challenging. You’ll need to provide two years of income from your business, and you’ll need to prepare profit and loss sheets, balance sheets, business and personal tax returns.
You’ll need to provide pay stubs for the last two to three months, W-2 forms, income tax returns for the last two years, and bank statements to verify the funds needed to close as well as any reserve monies.
If your income is dependent on commissions and bonuses, the verification process is stricter.
To consider commissions and bonuses as part of your income, underwriters want to see two years’ worth of commission and bonus income statements.
For the self-employed, the income requirements are even more challenging. You’ll need to provide two years of income from your business, and you’ll need to prepare profit and loss sheets, balance sheets, business and personal tax returns.
Income Verification and Interest Rates
The interest rate for your loan is directly tied to your verified income amount and your credit rating.
Both factors are strong, positive signals to the lender that the risk assessment for the loan is low. The amount of your down payment is also a factor.
(Federal and state mortgage programs will have different income requirements.)
Both factors are strong, positive signals to the lender that the risk assessment for the loan is low. The amount of your down payment is also a factor.
(Federal and state mortgage programs will have different income requirements.)
Underwriters Usually Ask Questions About Your Application
Don’t be surprised if the underwriter asks questions about your submitted documents. That is usually a part of the process.
Just answer questions quickly to keep the process moving along at a steady pace. Being upfront goes a long way to getting loan approval.
This process protects both the lender and the borrower. It helps to ensure that the buyer doesn’t take on more debt than they can handle. It helps to protect the bank from making a bad investment.
Just answer questions quickly to keep the process moving along at a steady pace. Being upfront goes a long way to getting loan approval.
This process protects both the lender and the borrower. It helps to ensure that the buyer doesn’t take on more debt than they can handle. It helps to protect the bank from making a bad investment.
Conclusion
Income verification is a critical step in becoming a homeowner. While it does take time to get your mortgage loan approved, it is worth it.
Owning a home is an excellent investment, one that grows the longer you own the home!
Are you ready to close on your new home? Turn to Lilly Title & Settlement. We’re obsessed with settlement legal details, so we can get you into your new home quicker!
Owning a home is an excellent investment, one that grows the longer you own the home!
Are you ready to close on your new home? Turn to Lilly Title & Settlement. We’re obsessed with settlement legal details, so we can get you into your new home quicker!
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