Real Estate & Mortgage Insights

Income, Ratios, Compensating Factors, & Home Loans

All across America, home prices are increasing faster than income. Do you qualify?

There are rules when applying for a mortgage, and there are "no rules."

Assuming you have a solid credit history, a down payment, and the lender likes the house you're buying, it comes down to monthly income. Not your after-tax income, but your gross income.

And your debt.

Sort of.

The infamous debt-to-income ratio measures what percentage of your monthly income is used to pay your debts.

Actually, there is not one ratio, but two. One is called the front ratio and the other is called the back ratio. The front ratio counts only the debts that apply to your housing costs. Principal, interest, insurance, property taxes, HOA fees, and mortgage insurance, if applicable.

For most loan programs, your housing costs should be no more than approximately one-third your monthly income.

The back ratio includes your housing costs plus your other monthly debt like car payments, credit cards, credit union loans, student loans and so on. It does not include your automobile insurance, life insurance, and items like that.

For most loan programs, your monthly obligations to debt should be approximately 38% of your monthly gross income. Or less.

If you earn annual bonuses or commissions, those can be taken into account, too, but they will be averaged over the last two years.

If you qualify under these rules, cool. You have no problem.

If you don't, you still have options, especially if you have absolutely great credit, a lot of money, or parents.

These are called "compensating factors."

Suppose you have a great FICO score, above 700 or so.

People with really high FICO scores almost always pay their debts, no matter what. Lenders will stretch their debt-to-income ratios to fit you in, provided they aren't stretching too much.

You are a good risk.

Stated Income:

If the lender is stretching you too far and you have a great FICO, you might qualify for a "stated income" loan with a lower down payment than those who merely have a "good" credit score.

You still have to make a down payment, usually at least ten percent.

With a stated income loan, you simply state your income on the loan application. Because of your good credit and down payment, the lender "trusts" you and does not verify your income.

"Ahem." Lenders don't want you to lie, of course. They review your bank statements to see if the cash flow through your account matches the income you claim. They check your "assets" and personal property to see if it jives with that income.

If you need a stated income loan, figure it out before you fill out your application.

Larger Down Payment:

If you have a good FICO (or a great one) and still need the lender to stretch your qualifying ratios a bit, they generally will do so if you can put twenty percent down.

If that doesn't help by itself, 20% down and a good FICO will normally let you into the "stated income" loan, too (see above).


How do parents help?

First, they can give you money. Lenders call it a "gift." Maybe you pay it back, maybe you don't. "Ahem." If you do intend to pay it back, don't tell the lender.

Parents can also be "non-occupying co-borrowers." Lenders will usually add about five points to your qualifying ratios if you have qualified family members who are non-occupying co-borrowers.

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