Income For Mortgage Loan Qualification
There are various factors that is taken in account when qualifying for a residential mortgage loan. Income for mortgage loan qualification revolves on factors such as income, credit, assets, debt, and liabilities. Income for mortgage loan qualification and the credit profile of the mortgage loan borrower are the two most important factors that will decide whether you are qualified for a mortgage loan. Income is much more important than credit. If you have poor credit but you have income, you will qualify for a mortgage loan. However, if you have no income but phenomenal credit, you will not qualify for a mortgage loan.
Types of Income that are used in mortgage loan qualifications
There are various types of income that can or cannot be used in qualifying for a residential mortgage loan. Cash income, Full Time income, Part Time income, Self employed income, asset income, social security income, and pension income.
Cash Income: Cash income cannot be used under any circumstances unless it is declared on your income tax returns for the past two consecutive years. Cash and undocumented income are worthless in the mortgage world. Many folks in the restaurant and hospitality business do get legitimate cash gratuities, however, that type of income cannot be used as income for mortgage loan qualifications.
Full time income: W2 income is the best source of income that is acceptable. If you are a full time wage earner with full time income, you will get W2’s at the end of the year. Two years worth of W2’s and a recent paycheck stub is what most mortgage lenders will use to qualify your income for mortgage loan qualification purposes.
Self employment income: Self employment income can be used for mortgage loan qualifications but the mortgage lender needs at least a two year tax history on your self employment income. For those who write many items and have negative income, will not qualify for a mortgage loan. Many self employed folks get a salary or hourly wage from their company and give themselves a paycheck every week and get W2’s at the end of the year like working as an employee for a company. On cases like that, they can qualify their W2 income to qualify for a mortgage loan but the underwriter will check to see if the company is at least break even. Taking huge losses on their company tax returns and giving themselves a salary will raise a red flag.
Asset income: For those mortgage loan borrowers who do not have a job and the only income is from their investments, we have mortgage loan programs that is called Asset Depletion Mortgage Programs. If you have a substantial investment account whether it is cash, securities, or retirement funds, we can take 5% of your assets and use that as your annual income. For example, if you have a $1,000,000 securities investment account and have no other income, we can take 5% of the $1,000,000 which is $50,000 and use that as your annual income.
Social security income: Social security income can be used as income and in most cases, Social security income can be grossed up by 25%. For example, if your net social security income was $1,000, your social security income can be grossed up to $1,250.
Pension income: Pension income can also be grossed up by 25% like social security income if you get a net pension check every month.
Why is Income more important than credit in mortgage loan qualifications
The days of no documentation mortgages and stated income mortgages are long over. The main reason why income is so important is due to the fact that the lender needs to be convinced that you will be making your monthly mortgage payments and not default on your loan. I have seen many cases where a home mortgage loan borrower has a successful business, tons of assets and cash, credit scores over 800, and then get denied for a mortgage loan due to the fact that he had written up tons of loses on his tax returns and very little net income for himself. However, I can get mortgage loan borrowers with credit scores as low as 530 FICO with open collections, late payments, prior bankruptcy, prior foreclosure, judgments, and charge offs approved for a mortgage loan as long as they have a documented income that can be verified by the IRS.