Columns
April 6, 2020
link to facebook link to twitter

Real Estate & Business

Scott Sheldon
Your income is a lifeline to finance a home
February 14, 2020

Getting mortgage loan financing requires you have a blend of sufficient, cash ample credit and income to offset a proposed new expense. You must have the right combination 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 your financial fabric of your mortgage application.

Basic accounting is income to offset expenses. Expenses in the eyes of a mortgage lender are not just a housing payment, which is usually comprised of principal interest taxes and insurance. On a mortgage, application expenses are also comprised of other obligations typically identified on a credit report.

These things include:

car loans

Student loans

Credit card payments

Installment loans

alimony

tax debt

child support

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. 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 allow for a housing payment more easily than another family that has high monthly expenses wherein the inclusion of mortgage payment could exceed an acceptable level in the eyes of a lender.

Lenders grant mortgage loans typically up to about 50 percent of your monthly income. This means 50 percent of your income can go towards a mortgage payment and other monthly expenses. 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 the scenario shakier. A more proactive way to fix such a solution would be to perhaps take some of your down payment money and reallocate those monies towards paying off non-deductible consumer debt. Nine times out of ten paying off junk debt will improve your borrowing power tremendously. Taking this approach will give you the income allowance to afford you the ability to purchase the home that you want or perhaps the higher price home if you are in a competitive offer situation.

Mortgage Tip: Let’s say for example you have $1,000,000 in the bank, you have an excellent credit score, but you don’t have any income. 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 credit score, but it’s primarily due to not having enough income in relation to the proposed mortgage payment they’re desiring to take on with their other monthly expenses.

Ways to improve how much mortgage you can get:

Changing mortgage loan programs, for 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 cosigner

Borrow less

**Pay discount points**

Lastly, consider paying discount points. Paying extra discount points to get a lower interest rate might be very well worth it if you can get a lower mortgage payment with your other monthly expenses.

 

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.