Determining whether your salary is enough to seek home loans isn’t straightforward as looking at your payslip. Several lenders will evaluate your income sources and debts to find out which mortgage is suitable for you and whether you can pay it.
When it comes to getting a home loan, here are some things you need to know before you decide to apply for a home loan:
Monthly Income
If you have a stable job, you will need to provide payslips and W-2s. If you’re self-employed, you will have to submit tax returns and any relevant documents the lender will want to see. Based on the home price you wish to buy, you might want to wait a year before you apply for the mortgage, especially if you’ve been promoted at your workplace.
If you work for several years, there is a chance that the lender may give you a home loan. Lenders will not only assess your salary when they are thinking about giving you the loan. Other sources they may look at include:
- Investment income.
- Overtime.
- Child support payments.
- Commissions.
- Military allowances and benefits.
- Alimony payments.
- Social Security income.
The other sources of income apart from your salary will depend entirely on the lender. The most crucial aspect, however, is the income should be consistent. For instance, if the alimony payment shows you will receive payment for one year, the lender won’t give you the loan.
Military Income
The rules will apply to military people and their families. The advantage soldiers enjoy is food, housing, and other allowances that can be used as income when seeking mortgages. Those deployed to war areas should offer relevant documents for confirmation because income earned in the war zones will not be taxed.
Other Gains
In most situations, interest and dividends will be seen as the only relevant investment income because capital gains will not be reliable long-term income. Because of the uncertainty, investment income might be discounted.
Here are some sources of income that you may show your lender:
- Rental income.
- Non-taxable income.
- Social Security income.
The lender reserves the right to assess these income sources to determine whether you qualify for a home loan. When making mortgage calculations, income not included in tax returns will not be considered by the lender.
Debt-to-Income Calculations
Several mortgage lenders will count on the debt-to-income (DTI) calculation to evaluate whether you can pay the home loan without hassles. The calculation will compare your monthly income, other sources of income, and your debt.
Credible debt sources include:
- Monthly car payments.
- Monthly Student loan payments.
- Monthly alimony payments and child support. ( they can be included if they are paid monthly by the relevant parties)
- Monthly credit card payments.
To determine the debt-to-income, the lender will calculate the monthly debts and divide the total with your monthly income. Several mortgage plans will need homeowners to have a DTI of 40% or less. But there are instances where you may get a home loan if you have a 50% debt-to-income. Lenders will want to make sure that you can pay the mortgage. They will approve the home loan if yearly payments are 30% less of the annual income.
If you believe your debts are low and that you can afford to make the payments, you need to speak to a reliable lender about the home you wish to buy. But to protect your interests and the mortgage lenders, you need to choose a home that you can afford. Don’t make the process complicated.
Down Payment
Lastly, the down payment is one of the crucial requirements needed to qualify for a home loan. The down payment is money you have to pay upfront, and you will need to have it if you want to get the home loan.
Making the down payment will make sure you have equity. This means you will be part-owner of the home. If you don’t pay the upfront cost or pay something, you could be at risk of spending more money for the house than what you could get when you decide to sell. There could be a financial crisis when you decide to move. This is because you wouldn’t pay what you owe.
Most lenders will not let you get a personal loan for the down payment. But, if you have excellent credit, you may get a piggyback loan. This will force you to take two different mortgages, one used to pay the down payment and the other valued at about 80% of the home’s total price.
