Sufficient income is one of the primary requirements for getting a mortgage. Before you begin your application, get familiar with the requirements for documenting your income and the effects other types of debt can have on getting a mortgage.
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There was once a time when you could simply state your income to certain lenders and they would take your word for it. Unfortunately, this relaxed practice led to many borrowers taking out mortgages they could not afford, with terrible results for everyone involved. Nowadays, there are very specific requirements for documenting your income.
During processing, W2 forms are verified with the Internal Revenue Service.
The standard documents to provide are W2 forms from the past two years and pay stubs from the last 30 days, though bank statements, tax returns or employer letters on official company letterhead may also suffice. As a general rule, you must show a two-year history of income from the same employer, from employers in the same industry, or from the same personal business.
Everyone’s situation is unique, of course, and exceptions can be made on a case-by-case basis:
AssetsYou need to provide a bank statement to show that you have enough money for the closing costs of the mortgage, the down payment (if you are buying a new home), and cash reserves for future mortgage payments (required for certain large mortgages). If all this money hasn’t been in your bank account for at least two months, your lender will require additional documentation explaining where you got it from, to ensure you are not using a personal loan to get a home loan.
Lenders use your debt-to-income ratio, or DTI, to make sure a mortgage will not put you in more debt than you can handle. The general rule is that your total monthly recurring debt, including your housing expenses, should not be more than 45 percent of your gross monthly income.
Your monthly recurring debt should not total more than 45 percent of your gross monthly income.
If your gross monthly income is $5,000, and the maximum DTI is set at 45%, your monthly recurring debt should not total more than $2,250.
Gross Monthly Income * 45% = Maximum Monthly Recurring Debt Example: $5,000 * 0.45 = $2,250
Now say that you have a $550 student loan payment and a $350 car payment to make every month, totaling $900. Since you already have these large debt payments to make, you need to subtract them from your maximum monthly recurring debt to find out how much is left over for your housing budget.
Maximum Monthly Recurring Debt – Current Debt Payments = Maximum Monthly Housing Budget Example: $2,250 – $900 = $1,350
If your estimated monthly housing costs for insurance, taxes and fees is $100, then your maximum mortgage payment would be $1,250.
Monthly Housing Budget – Monthly Insurance, Taxes, and Fees = Maximum Mortgage Payment Example: $1,350 – $100 = $1,250
Your lender can then use your maximum mortgage payment to set your maximum loan amount, based on the loan’s term and interest rate.
Example Gross Annual Income: $60,000 | Monthly Recurring Debt: $900 Term: 30 years | Interest rate: 5% Estimated Monthly Payment (at 45% DTI): $1,250 Estimated Loan Amount: $232,800
Keeping DTI below 45 percent is a guideline lenders prefer to follow, but every situation is unique. While it is useful to calculate estimates on your own, working directly with a Loanwise specialist will give you the clearest picture.
Your lender will ask you about any payments to credit accounts listed on your bank statement. If you are planning to use the money from a cash-out refinance as the down payment for an investment property, your expected monthly payment for the mortgage of this other purchase must be factored into your DTI as well.
Deferred loansNote that if you have a student loan that is deferred or does not specify a minimum monthly payment to fully pay off the loan, your lender may factor it into DTI by taking 1% of the total balance and treating it like a monthly recurring debt. For revolving credit card accounts with no minimum payment, your lender may use 5% of the total balance.
There is no one-size-fits-all list of required documents for a mortgage application — it depends on your circumstances. For example, as long as you are not self-employed, your lender may not ask for your tax return. If you are refinancing, you may not need to present bank statements. One the other hand, if you have filed for divorce or bankruptcy in the past, your lender may ask for extra documentation from you.
Whatever the case, there are two essential things to remember: