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Documenting Income and Debt

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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Documenting Income

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:

  • If you are self-employed or you do freelance work, your lender will refer to the taxable income you have reported on your last two income tax returns. (This is one important reason not to under-report your income to the IRS.) If your income has risen from one year to the next, your lender may take the average of both years. If your income has decreased, your lender may instead use the lower amount, unless there were extenuating circumstances.
  • If you got your job less than two years ago because you recently graduated from college, your job’s income may still count as long as you work in the same field you got your degree in.
  • If you have a gap in your recent employment history, this may not be a problem if you show relevant employment before and after the gap as well as a steady source of income during the gap.
  • If you have a second job, you can add that income to your application if you have had the job for at least two years. The same goes for a third job and so on. All part-time income requires a two-year history with the same employer.
  • Bonuses, commissions, and overtime pay must also be consistent over a two-year period to be included.

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.

Debt-to-Income Ratio

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.

  • Housing expenses include mortgage payments, home and mortgage insurance, property taxes, and any condo or homeowner association fees.
  • Monthly recurring debt refers to monthly payments you cannot cancel, such as car payments or minimum credit card payments.
  • Gross income is simply how much money you make before taxes are taken out of it. For example, if you earn $60,000 per year before taxes, you would divide it by 12 months to find your gross monthly income of $5,000.

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 exact DTI requirement will depend very much on your individual circumstances.

What Counts as Monthly Recurring Debt?

  • Car payments
  • Student loan payments
  • Minimum credit card payments
  • Loan payments for financed appliances or furniture
  • Alimony
  • Child support
  • Any other monthly expenses you cannot cancel

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.

What to Provide During the Application Process

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:

  1. You must provide accurate and complete information from the beginning of the application process. If your lender preapproved you based on false or incomplete information, your mortgage offer may change once all the facts come to light, or you may not be able to get approved at all.
  2. You must provide all required documents on time to avoid a delay in processing. Lenders ask for documentation because they have to follow federal regulations and guidelines. It is not optional.
View Sources
  1. Consumer Financial Protection Bureau. (n.d.). What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important? Retrieved from
  2. (n.d.). Debt-To-Income Ratio - DTI. Retrieved from
  3. Lewis, H. (2015, June 2). Documents the Mortgage Lender Will Want from You. Retrieved from
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