Another Piece to the Pre-Approval Puzzle — Income
Posted on October 5th, 2011 by DarcyAs you learned in the previous blog, in most instances, you do need a job with income to get a loan. I should be careful saying this, as there are people with steady income via social security, pension, disability or investments that technically don’t have employment and could still get financing. So, the other important piece to this ever-changing pre-approval puzzle is INCOME!
Long gone are the days we could do those crazy no-income verification loans. In order to figure out what you qualify for, there needs to be income. We can’t just write a guesstimate down on the application or use a number that “looks good” from the tax return. And just so I am clear here, doing this was NEVER okay, but many people in my industry took some pretty dangerous liberties. Need I say more??
Income comes in MANY forms — the most common is employment. This is the most logical place I will look. But some income is sneaky and not-so-identifiable. Such as investment income. Many people have assets that earn interest or dividends on a yearly basis. If the same assets have earned income for the last two years, we can use these as income.
Could we count rent from your sister for income? The easy answer is no since a lot of things have to fall in place to use this. Most importantly, will she be living with you in the new home and will she continue to rent?? If yes, then the question — can this income be documented with canceled checks from her to you for the rent and did you claim it on your taxes as income with a preferable two-year history??? If so, then there is a good chance we can.
How about the second job you got so you can save more money for down payment? Easy answer … maybe. Again, more questions. Have you been working two jobs for the last two years? (we sure like the two-year history thing in lending, don’t we??) This is really the most important question. If the answer is yes, then more than likely we can. We’ll look at the hours you put in at both and may have to do some averaging to determine the actual numbers we can use for qualifying. If, however, you started the job a year ago or 6 months ago to save for down payment, then no, we can’t use it for qualifying. It is still a good thing and will still help you during this process!!!
How about self-employment or commission income?? You’ll love this … need a two-year history to use these types of income. And so you know, lenders use the income you reported to the IRS, meaning we use the NET income (or loss for some) after you write-off expenses. A few things can be added back, but without a lesson on tax returns and lending, this is the easiest thing to remember …. NET.
The two-year history holds true if you want to use tips, bonuses, overtime or even seasonal employment. Tips, by the way, actually have to be claimed to use — so either they show up on your paychecks or your taxes and if they don’t we can’t use them. Oh, and speaking of seasonal employment, we can even use UN-employment income for qualifying if you work seasonally and have the two-year history of receiving both.
Something I want to point out here relative to first time buyer programs — these special programs have MAX income limits for qualifying. Even if we can’t use all of your income for qualifying because it’s less than two years or for some other reason, we MUST still use it in calculating income for the program. Federal guidelines require us to use ALL household income, regardless of it’s source or history.
Let’s say your spouse isn’t on the loan due to credit issues. Though we aren’t using ANYTHING about their situation on the loan, we still MUST calculate their income for the first time programs. And if you receive child or spousal support, we must use it under the program guidelines. If you choose, you could also use this in qualifying for a loan; but there needs to be a history of receiving this income (which that history varies on the program you’re doing); it needs to be on-time and we must document it will continue for at least three years.
Are you a fan of the races or playing a mean hand of poker? Gambling winnings could be counted as income if consistently received for the past two years! Rental income from investment properties you own can be used as income. Payments of pension, social security or disability could be used as income — have to meet not only the two-year rule, but we also need to show the income will continue for at least three more years, just like child or spousal support.
I am sure there are many income situations I haven’t listed and maybe some that are so obvious, they aren’t coming to the top of my head. The main gist to remember is the “power of two” — having that two-year history. Not all sources of income require this, but most do, so it’s a good rule of thumb.
As always, I am happy to go over your income situation to determine if we can use it when helping you qualify for a loan. Next piece to our puzzle — assets — gotta have ‘em!
Tags: first time buyer programs, first time home buyer, loan process, loan qualifying, pre-approval
