How Income Impacts Loan Qualification

By: Patrick Boyaggi, CEO & Co-founder of RateGravity

Background

One of the criteria used by lenders to determine if you qualify for home financing is your debt-to-income (DTI) ratio. This formula helps lenders determine if you have the capacity to meet your monthly debt obligations, including your mortgage payments. To qualify your loan, lenders consider the total income that you receive.

What You Need to Know

Lenders will require you to prove a minimum history of two years of employment income. Income that has been received for a shorter period of time may be considered as acceptable income, as long as your employment profile demonstrates that there are positive factors to reasonably offset the shorter income history.

If you rely on overtime or bonus income for qualifying purposes, you must have a history of no less than 12 months for it to be considered stable

Documentation Requirements for Base Pay, Bonus and/or Overtime

• -Two most recent paystubs, and
• -IRS W-2 forms covering the most recent two year period.

Please note that if a Lender is uncertain about your income, they can independently contact your employer to verify employment. To document this, they will complete a Fannie Mae form 1005 – Request for Verification of Employment (“Written Request of Employment” – WVOE).

Lenders are also required by Agency guidelines to complete a Verbal Verification of Employment (VOE) for each of your employers within 10 days of closing to ensure you are still employed in the same manner as you stated in the loan application.

Job Changes

If you have recently changed positions with your employer, it is up to the lender to determine the effect of the change on your eligibility and your opportunity to receive bonus or overtime pay in the future. As a result, lenders are likely to request that your employer complete a WVOE to validate the impact of this change. However, in some instances, a WVOE is not sufficient and this can be cause for a lender to omit the income from your qualifying calculations.

If you have historically been employed on a part-time basis, but you will now be working full-time, the lender must obtain written confirmation from your employer in order to include the income in your qualifying calculations.

Base Income Calculation Guidelines:

After the applicable income documentation has been obtained, the lender will calculate the borrower’s eligible qualifying base income. The following table provides guidance for how a lender will calculate income:

Lenders will compare all of the above calculations with the documented year-to-date base,earnings (and past year earnings, if applicable) to determine if the income amount appears to be consistent

Military Income:

Military personnel may be entitled to different types of pay in addition to their base pay. Flight or hazard pay, rations, clothing allowance, quarters’ allowance, and proficiency pay are acceptable sources of stable income, as long as the borrower can prove that the particular source of income will continue to be received in the future.

Income paid to military reservists while they are satisfying their reserve obligations also is acceptable if the borrower can prove it is stable and will continue for at least 3 years.