Mortgage Application Factors: Part 2
Application Factor – The Income and Employment Piece of the Puzzle
The main factor with your income is consistency. When reviewing an application, your RMS Loan Officer will want to see that you have a steady source of income, and will take the following items into consideration:
- How is your income determined? Hourly, salary, commission-based, self-employed, or guaranteed monthly incomes from social security, or pensions/retirement.
- You will be asked for tax returns, proof of employment, or other specifics.
- They will also want to know the name of your current employer, what your position is, how long you have had that specific job and how long you have worked in that industry.
The main factor with your income is consistency. Your Loan Officer wants to be sure you have a steady flow of income to demonstrate your ability to consistently make your mortgage payments on time. For example, if commissions represent a significant percentage of your overall income, they will want to see a history that demonstrates consistent month-to-month commission income over time.
Why is this important? Using the income information you provide, your RMS Loan Officer will calculate your debt-to-income expense ratio, or DTI. This directly relates to how much you qualify for and can afford to pay each month. To get your DTI divide your monthly debt by your gross monthly income. This will be the percentage of your money that can go towards your debt and monthly mortgage payment.
From here, it’s up to you to decide how much you are comfortable paying each month considering your total household budget. Then, your RMS Loan Officer will work the numbers to give you a working home purchase price range.
Once you settle on a number you’re comfortable with, your Loan Officer will work the numbers backwards to draw up a plan from the monthly payment to what the price of your home might look like so you can go shopping for homes in that price range. Do not get discouraged if you feel you need to adjust your comfort number or even the area you want to live considering home prices you find. Adapting to the market is often a part of the process and it may take some time to find the right home, but your Loan Officer will always be there to guide you as you consider a full range of options.
Application Factor – The Assets Piece of the Puzzle
The last factor in the application puzzle is understanding your assets. Assets are sources of money other than your employment income that you can use towards the down payment and closing costs on your new home. When your lender is reviewing your bank statements, they will look for other liquid assets as well as your employment income.
Different types of assets:
- Cash available in your checking and savings. Keeping funds in these types of accounts allows you to make deposits whenever necessary and it’s easy to access your money when needed. Because all funds being used towards a mortgage loan need to be verifiable, you should be careful about making any large out of the ordinary deposits. Lenders want to make sure you are not taking on additional debt to use towards the purchase of your home (for example -- by borrowing money from a friend or family member), so if they see an unusual deposit into your account, they will need to verify where it came from.
- However, if you do want to receive help for a down payment, you can choose to utilize gift funds from a relative as an asset. It must be a true gift with no expectation or requirement for repayment of those funds. It’s best to establish the gift funds in your account as early as you can to move the loan process along quicker, but make sure you have the proper documentation to evidence the transfer of gift funds.
- Buyers can also choose to take advantage of any retirement funds they have saved. Using your retirement account could change your plans for the future, but if drawing from other assets is not an option, the pros might outweigh the cons for this scenario. If you do decide to withdraw funds from your retirement there will usually be a tax associated with it, so make sure you are aware of that as well and consult a tax professional for further information.
Buying a home is a life milestone people save towards; it is always a good idea to be on the lookout for places in your life where you can save money. Every little thing can add up over time, so your future self will thank you for any spending you can cut back on now.
We hope this information about Mortgage Application Factors has been helpful and gives you a better understanding and confidence level as you proceed with your home financing journey. If you missed the last couple of blogs, you can follow these links to learn more about the other key components of the home financing process: Why Choose an RMS Loan Officer and Part 1 of the Application Factors. As always you can reach out directly to your local RMS Loan Officer, who will be happy to answer any additional questions you may have.