Reasons for Mortgage Pre-Approval | Income

This is part 5 in my series about why not to skip a single step in the Arizona mortgage pre-approval process called “Reasons for Mortgage Pre-Approval.”  See the rest of the series.

Reason #1:  Determining What Income Can be Used 

One of the most important elements when applying for a home loan is determine what income can be used to qualify.  Often times a potential home buyer  may feel as if they have know what their current gross income is.  While it is reasonable to agree that a person is aware of their own income it is a scary proposition to have a borrower think they know what current underwriting guidelines will allow in terms of “qualified income.”  Income can be higher or lower than what a borrower things which directly impacts what mortgage amount they will be qualified for.

What is qualified income? Qualified income is the income that is allowed to be used for the purposes of mortgage approval.  There are certain types of income that may not be allowed to be considered and there are certain types of income related deductions that must be subtracted from a borrowers income for the purposes of loan approval.

Unexpected Hurdles in Home Loan Pre-Approval

1. Overtime income:
A borrower must establish and document of having earned overtime income for a specific period of time in order for it to be included in the effective income calculation.  In addition, if a borrowers employer fills out a verification of employment (standard form required on a mortgage file) and states that overtime will not continue it may present challenges to including the overtime income in a borrowers application.

2. Child Support/Alimony Income or payments:
A borrower may have become accustomed to receiving or paying child support and/or alimony.   Child support and or alimony can be included in or deducted from effective income under certain circumstances. However, if a borrower cannot establish that child support income will continue to be received or paid for a period of three years it cannot be included or does not need to be deducted from effective income.

3. Rental Income:
Borrowers often think that they can include rental income from their rental properties at face value based on the gross rent due according to a lease agreement.  Lenders must look at a borrowers tax returns (Schedule E) to determine what income can be used per rental property.  In short, lenders must take the income and expenses related to a property before determining what rental income can in fact be used.

4. Self Employment Income:
This subject is rightfully its own blog category (or series of blogs).  Suffice it to say that there are numerous aspects of a self-employed borrowers business and/or  personal tax returns to determine what income can be used.

5. Social Security Income:
There are some cases where a lender must consider Social Security income on a dollar for dollar basis.  In other cases, lenders can actually give a borrower credit for 125% of their social security income allowing them to qualify for a higher loan amount.

There are many more examples of how a borrowers effective income can vary from their perceived income.  Sometimes we need to take additional steps such as ordering verification of income and reviewing tax returns with a CPA that can take a little extra time.  It is imperative to take these steps because in the end, an underwriter will ultimately evaluate every detail of a borrowers income before determining what can be used for loan approval.  My job is to know how to evaluate income accurately in order to avoid surprises in underwriting.

By Jeremy House


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