Income & Assets

Full Documentation

This means that you have proof of everything, both income and assets, that you put on your application. This list includes:

• Last 2 years of W-2 statements
• Last 2 years of tax returns
• Pay stubs for the last 30 days
• Documentation for income like bonuses, alimony, etc
• Down payment funds
• Closing cost funds
• Cash reserves
• 2 months of bank statements
• Investment portfolio statements

6-12 Months of Bank Statements

This may be an option for borrowers whose income is derived from their assets. You will not show W-2 statements or pay stubs, but instead will provide 6-12 months of bank statements.

Verifying your Employment

If you are employed by a company, the lender will check your W-2s and verify employment by speaking with your company. If you’re self employed, your tax returns will be required and your CPA may need to provide additional information.

Earning History

Lenders want to see a consistent history of your earnings. This could mean two years of consistently high W-2 statements and tax returns for the same position. You could also show positive career trajectory that has resulted in a steady current income.

Taxable Income Requirements

Not all money can be counted as income. Lenders focus on taxable income which can trip up salaried workers and self-employed business owners who claim expenses. For example, if you are a self-employed web developer, you may have unreimbursed travel, mileage, parking, etc. This earns a nice tax write-off, but reduces income that can be included on your mortgage application.

Make a Rough Estimate

Do some very simple math for a rough estimate of what you can afford. In general, a buyer could afford a home that costs 2 to 2.5 times their annual gross income. If you bring in $80,000, that is a house that is between $160,000 and $200,000. This estimate omits whether or not you’re able to make a 20% down payment, have good credit, and other expenses.

Debt to Income Ratio (DTI)

You will need to know what percent of your monthly income would hypothetically go toward home payments and expenses. As far as lenders are concerned, these numbers play a big role in what you can afford.

A front-end debt-to-income ratio looks at how much of your monthly income goes toward housing expenses. Lenders add up a home loan’s principal, interest, taxes, and insurance and divide it by your gross monthly income. Ideally if a home loan does not exceed 28% of your gross income, many lenders will be okay with a higher number.

A back-end debt-to-income ratio involves many more expenses including credit card payments, car payments, student loans, etc. This means the ratio will be a higher portion of your gross monthly income. Typically, lenders expect this number to be below 36%.

Income Calculations

Get an accurate figure by combining salary, bonuses, investments, dividends, alimony, and any other sources of income. When you calculate monthly expenses, factor in minimum payment due for credit cards, monthly car payments, student loan payments, and any other recurring expenses.

Lender Requirements

DTI limits are expressed as 30/45, meaning your mortgage payment cannot exceed 30% of your monthly gross income, and housing expenses and other monthly debts cannot exceed 45%.