Income requirements to qualify for a mortgage

Are you wondering if your income is sufficient to achieve your financial goals? Have you tried to qualify for a mortgage only to be disappointed that it didn’t work out the way you planned? Not everyone has all the income and supporting documentation to qualify for a mortgage. Luckily, there are many different loan programs that have varying income qualifying guidelines.

How to Document Employment Income

Employed

  • Requires two or more years of consistent employment.
  • Must provide W-2s for the past two years and year to date pay stubs.

Self Employed

Traditional Income Documents

  • Requires two years of tax returns and financial statements year-to- date.

Non Traditional Income Documents

  • Requires 12 – 24 months of bank statements to demonstrate the income you have received.
  • This would be a Non-Prime / Non-QM loan program. This type of loan has higher rates and fees than a conventional loan, but if you need this option to qualify it may be well worth it!

Residential Properties

Whether your are using Traditional or Non Traditional Loan Programs, you still need to meet a Debt-to-Income Guideline.

Loan Types

Debt-to-Income-Ratios (Front End Ratio: Housing payment / Gross Income.

Back End Ratio: Housing Payment + Other monthly Obligations / Gross Income)

Income Documentation Required
Conventional 36% & 45%, but can go higher with compensating factors.

Employed: 2 years of W-2s and pay stubs.

Self Employed: 2 years of tax returns and financials.

Jumbo The Front-End Ratio is not considered as much, but there is less flexibility on the Back-End Ratio, and typically can not exceed 43%.

Employed: 2 years of W-2s and pay stubs.

Self Employed: 2 years of tax returns and financials.

FHA Maximum front and back end qualifying Debt-to-Income ratios for borrowers is 31% and 43%. But exceptions up to a 50% Back-End Ratio are possible with compensating factors.

Employed: 2 years of W-2s and pay stubs.

Self Employed: 2 years of tax returns and financials.

Non-Prime Maximum Debt-to-Income Ratio is 50%

Employed: 2 years of W-2s and pay stubs.

Self employed with traditional documentation: 2 years of tax returns and financials.

Self employed with non traditional documentation: 12-24 months of bank statements and proof of self employment for 2+ years. These loans have higher rates and fees than traditional documentation.

Reverse Income is not required. But Age and Equity are primary factors for this program. Since income is not required, there is no need to document it.
2nd Mortgages Similar to Jumbo Loans, 2nd mortgages have lower back- end ratios due to the higher risk. Typically they max out at 43%.

Employed: 2 years of W-2s and pay stubs.

Self Employed: 2 years of tax returns and financials.

Investment Properties

Loan Types Income Requirements
Ground Up Construction Income is not required, but solid financials go a long way toward meeting the underwriting guidelines of a project.
Fix and Flip Income is not required, but experience with flipping typically is. Proof of that can be achieved by providing Final Settlement Statements and a list of past projects.
Long Term Residential and Commercial Income is a key component of Long Term Residential and Commercial loans. These loans typically have a minimum Debt-Service-Coverage Ratio which involves the housing payment, plus other monthly costs, divided by the gross income. This ratio should be at least 1:1, and optimally would have a ratio of 1:1.25.

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Frequently Asked Questions

What is a Debt-to-Income Ratio?

A Debt-to-Income or a DTI ratio is derived by dividing your monthly debt payments by your monthly gross income. The ratio is expressed as a percentage, and lenders use it to determine how well you manage monthly debts. 

What is a Front-End Ratio?

A Front-End Ratio is the proposed Housing Payment divided by the gross monthly income.

What is a Back-End Ratio?

A Back-End Ratio is the ratio of the proposed Housing Payment, and the borrower’s monthly obligations, like auto or credit card debts, divided by the Gross Monthly Income.

What is the reason for a Debt-to-Income ratio?

Generally, lenders view consumers with higher DTI ratios as riskier borrowers because they might run into trouble repaying their loan in case of financial hardship.

What is an ideal Debt-to-Income Ratio?

Lenders typically say the ideal Front-End Ratio should be no more than 28 percent, and the Back-End Ratio, including all expenses, should be 36 percent or lower. In reality, depending on your credit score, savings, assets and down payment, lenders may accept higher ratios, depending on the type of loan you’re applying for.

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