What Income Do I Need, To Qualify For That Property?

What Income Do I Need to Qualify For That Property?

A seemingly harmless question, but a loan officer answering this question is a frequent gateway to loan applicants creating fraudulent documentation.  The FBI discourages loan officers from answering this question, in favor of “let’s take a look at your income documentation and see what we can qualify you for. 

 Income documentation considerations:  IRS Personal Tax Returns, 1099s and/or W2’s from the employer (a) Self-employed as a Sole Proprietorship, Partnership, S-Corporation, Corporation or a combination – two years of tax returns for each entity would be required  (b)tax write offs  (c) what effect are tax write offs having on your net profit which is the figure that will be used to qualify a self-employed person.

 What is considered self-employment?  (a) More than 25% of the income earned is NOT a salary.  (b) When you receive 1099s instead of W-2s at the end of the year summarizing the total income you have earned that year.  (c) someone who receives 75% of their income in commissions, an independent contractor, a RN who works per diem with several employers, contractor, painter, plumber, therapist, personal trainer or coach are some examples.

                 The penalty for making a false statement in a loan application is a $1,000,000 fine and or 30 years in prison. A loan officer’s comments can lead to people making false statements.  As part of the financial/mortgage crisis, a FBI disclosure has became part of all mortgage loan applications and borrowers must acknowledge receipt of the disclosure that explains the penalty for submitting fraudulent information.

 Income to qualify is calculated differently depending on 1.  history of the income, stability of the income, likelihood of the income continuing in the future, self-employed, salaried, hourly.  Certain tax write offs impact qualifying like Form 2106, employee business expenses…..these expenses are considered in qualifying.  Depending on the lender, IRS Form 2106 expenses impact the ratios by being treated as an additional debt obligation or a deduction from income.

 Qualifying is also based on the interest rate available at the time of entering into a bone fide purchase contract.  Many borrowers spend a lot of time shopping rates as the only determining factor on which lender they choose.  It could be helpful to pay more attention to service, “user friendliness”, and other items as well.

 In the case of a residential purchase transaction, if a property has not been selected and a contract signed and confirmed, the interest rates will be floating and ultimately determined when the offer to purchase has been accepted and signed by the buyer and the seller.  If refinancing a property, upfront rate locks are available with a complete application. 

 Given that the income is the same;  the lower the qualifying interest rate, the larger the amount a person can qualify for.  The higher the interest rate, the lower the amount a person can qualify for.

 There are the industry guidelines set by;  FannieMae, FreddieMac, FHA/VA, Conventional, Mortgage Insurance Companies, but lenders, particularly banks tend to impose OVERLAYS  to guidelines you may read about on the internet.  An overlay is a different version of the generally accepted guideline of the loan program.  Overlays are typically more restrictive.

 FICO Scores impact qualifying, only a mortgage credit report FICO score is accepted.  There are other types of credit scores generated by other companies.  Lender requirements are typically different for mortgage insurance companies.  Mortgage insurance is required if the down payment is less than 20% of the appraised value. 

 Lending guidelines are subject to change without notice.  What worked in the past may not be what will work at the time you are applying for a home mortgage.