The Basics of First Time Home Buying - Income and Assets
Income/Assets & How It Affects Buying A Home.
Income is essential to determining the borrowers ability to repay a home loan. Assets are usually used to determine the borrower's ability to have reserves in the event of a loss of income.
Debt to Income Ratio, common referred to as DTI, is the computation of how much monthly minimum payment on trade lines compares to gross monthly income.
Income, for home loan qualification, is based on monthly income usually a two year average of income. Job history is important to determining two year average.
Typically, employment is either hourly/salary or self-employed. Non-self employed hourly/salary employees receive a W2 each year. This document will provide the lender with the income that is actually earned by the borrower. When getting a home loan you should have at least a two year history employment and W2's for the previous 2 years.
Lenders will review the income and will tend to qualify the borrower off of the gross income paid out. Deductions for retirement accounts, flex spend accounts and taxes are all part of the total amount earned and are included as income. Items that are deducted directly from pay, such as child support, separate maintenance and other debt payments will be taken as an expenses and added as a debt to the DTI.
Lenders tend to qualify the borrower off of the gross income but borrowers should keep in mind that the net pay (take home) is much less than gross pay. So, although the lender may say the "numbers work" with the income the borrower must remember their own spending habits and make sure they truly can live on the "take home" pay with the addition of the new mortgage payment.
Self employed borrowers are 1099 at the end of the year. This usually means they are fully responsible for paying their own income tax and employer based taxes. Full tax documents are usually required for self-employed borrowers. Many self-employed borrowers have tax deductions to off-set the business expenses. These deductions are usually removed from the income used to qualify and it is them reviewed by underwriting to determine actual income. Schedule C are also usually submitted with the income documents.
You should plan on showing reserves when qualifying for a new home loan. Reserves can be checking, savings, 401k retirement accounts, stocks, bonds, mutual funds. These are liquid assets unlike other assets like automobiles and furniture. These liquid assets should be shown with most recent statements. For banking accounts a typical first time home buyer would show the previous 2 months of statements.
If a buyer is using funds from any account the money used for closing/down payment must be 'seasoned' meaning it cannot just be a cash deposit without tracing the funds history. In addition, any money's being transferred or gifted in the purchase must be traced through documentation.
For Example: If you are getting a gift from a relative to use during the home buying transaction. You will need to get a bank statement from the relative showing the funds in the account, get a withdraw slip of the money being taken out, a statement of your bank account prior to the deposit of the gift and a statement showing the gift.
Assets, should at minimum, be two months of reserves which is 2 month mortgage payments. Additional reserves can sometimes hep with getting a loan approval or as compensating factors.