It is not by happenstance, that lenders place high importance on income, but rather microscopic compliance regulations imposed on them by the Consumer Financial Protection Bureau (CFPB). Have one or more alternative income source? Read on…
A home loan lender is going to look at your income, as a means to offset a mortgage payment liability (in qualifying this is comprised of principal and interest, taxes, insurance and any other costs associated with carrying real estate such as PMI or a homeowners association payment). As a general rule of some, the lender in approving your loan, will want your income to be 55% greater than your outgoing mortgage payment plus other liabilities such as consumer obligations, and other debts. For example if you have a W-2 income, and you have additional income coming in via a nontraditional source, if that nontraditional source income cannot be used, you will not be able to borrow as much, simply put.
Alternative Questionable Income Sources
Border income- the extra $600 per month you receive from renting out a room in your home will not be counted against a mortgage payment. The only exception to this rule- your property must multi-unit, the second unit must have a bedroom and the bathroom and bona fide kitchen in order for it to be considered a unit in order to use revenue generated from that rent for mortgage qualifying purposes. The additional room in your single-family home, you’re renting out cannot help you in a sense of improving your borrowing power directly, however, it can be used to accumulate down payment funds in a savings account which can be used to help acquire the home so it may indirectly go against a mortgage in the sense of creating additional savings/down payment.
Rental Income-this one is a catch 22 and here is why. Most lenders give 75% of the rental income to help qualify a borrower on the acquisition of a rental property, not the case dollar for dollar when refinancing. The Schedule E. of the federal tax return identifies not only the rental properties and the gross rents collected, but also the expenses associated with owning real estate. These additional expenses at the end of the year can reduce the income needed to otherwise offset the mortgage payment. Be cautious when hoping to use your rental income to qualify. Expect a home loan lender to average net losses and/or net gains over the most recent 24 months.
Unreported Income-Cash side jobs in particular or any other income you receive that you don’t report to IRS is not going to be considered real income. Lenders don’t take kindly to tax cheats. Same idea as the border income, these monies can help with down payment funds so long as the money is seasoned in a bank account. Lenders want the borrower’s most recent last two months of asset statements when applying.
Gross Receipts/Bank Statements- a big misconception self employed borrowers usually have when they go to apply for a mortgage is thinking they earn more money than they really do. The Schedule C. on a Sole Proprietorship return does show gross receipts, but lenders don’t use gross receipts to qualify, they use the net income figures after expenses including depletion, depreciation, business use of the home and net profit because are the figured you’re paying taxes on.
These figures 9 times out of 10 are far less than the gross receipts. Also in this arena, using bank statements’ gross revenue as tax return alternative won’t fly with 99.9% of the lenders making residential mortgage loans. While there may be a small pocket of banks offering such nontraditional financing, the lenders offering the super Fannie Mae/Freddie Mac low rates want want to see your Schedule C. and specifically what income you actually pay taxes on for granting a loan.
Trust Fund Income you will need to provide these details: trust income you receive, terms of payment, duration of the trust and non -taxable portion with at least a three year continuance otherwise this income will not count against mortgage payment.
It very well may come to light that for whatever reason you don’t have supportable income on paper necessary to count against a mortgage. Fear not, you can create income to qualify! By paying off debt such as a car loan for example or any other liability, you increase your income to qualify. For example let’s say you have a car payment $500 per month, with a balance left a $10,000. Paying off the car with capital of $10,000, creates $500 per month more in income not factoring in taxes as the lender uses pretax income to qualify. In other words, you just gave yourself a $6,000 (6k/12 = 500) per year raise dollar for dollar that will be counted in qualifying against a mortgage.
Other Options For Legitimately Boosting Lending Income
- Taking Social Security early
- Taking an IRA distribution
- Creating dividend income via a withdrawal over time from an asset account
- Getting a cosigner
- Generating more revenue showing higher net profit on a Schedule C.
- Raising your credit score-could work if your score is raised high enough to fit you into an alternative loan program requiring less income to qualify, due to a lower payment
Borrowers, recognize while good credit is absolutely important as is savings, income remains supreme in today’s lending environment. An individual with stellar credit, $1 million in the bank, with low income, isn’t in the cards for a mortgage anytime soon. Have the alternative income? Be prepared to support the income with the how, what, when, and for long long questions the lender will ask.
Need a mortgage? Have alternative forms of income? Start by getting a complementary mortgage rate quote online today.