Getting mortgage loan financing requires you providing a blend of good cash, ample credit and income to offset a proposed new expense, i.e. a mortgage loan. You must have the right blend of all three in order to purchase or refinance a home. What might not make sense however is the lifeline that’s going to link all the pieces together is income. Here is how income is woven into the financial fabric of your mortgage application.
Basic accounting is income to offset expenses. Expenses in the eyes of a mortgage are not just a housing payment which is usually comprised of principal interest taxes and insurance. On a mortgage application those expenses are also comprised of other obligations typically identified on a credit report.
• Student loans
• Credit card payments
• Installment loans
Any monthly obligation of any kind that shows up on your credit report is an expense that has to be woven into your ability to qualify for a mortgage. This also includes other obligations that might not be listed on the credit report such as an IRS tax installment plan, child support paid, or alimony paid. All those expenses must be taken into consideration against the principal interest taxes and insurance mortgage payment, and your income must be strong enough to offset all those obligations.
For some families, it doesn’t become all that problematic because their current monthly expenses are very low. Such a scenario paints a very favorable picture to a lender because they could allocate for a housing payment. Other families may carry higher monthly expenses wherein a new mortgage payment could exceed an acceptable level in the eyes of a lender.
If your proposed new mortgage payment plus your other monthly expenses exceed 50 percent of your income, it’s not an automatic no you can’t get a mortgage, but it does make your ability to procure a loan much more challenging. A more proactive fix would be to perhaps take some of your down payment money that you were going to use to purchase the house and reallocate those monies towards paying off consumer debt. Nine times out of ten, paying off consumer debt will improve your borrowing power and will yield you a greater velocity of your income allowance, giving you more options to buy a home or refinance the one you have.
Income is so important in today’s world of mortgage lending, there are other scenarios that make sense that you think might work actually would not.
Let’s say for example you have $1,000,000 in the bank and you have an excellent credit score, but you don’t have any income so you can’t get a mortgage.
The same situation- instead you have a million dollars of equity in the bank you have several months of mortgage payments saved up in the bank, good credit, but no income once again you can’t get a mortgage.
All three elements must be in place: credit score, equity and or down payment and the granddaddy which is income. The number one reason why people get denied mortgages today is not due to a credit score, but it’s primarily due to not having enough income in relation to the proposed mortgage payment.
Ways to improve spending power lowering your debt to income ratio include the following:
Changing mortgage loan programs as an example going from a conventional loan to an FHA loan
Paying off a debt to qualify. for example. potentially paying off a high payment credit card
Getting a raise at your current job or potentially changing jobs to a new career with a higher compensation package
Getting a co-signer
Apply for less of a mortgage amount
You owe to yourself to work with a lender who has the experience and understanding to help you put together a solid mortgage foundation.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.