Use Regular Income For Paying Down Debts
Additionally, you can learn how to build wealth from nothing once your debts are settled and continue to use your passive income for your mortgage.
If you have more passive income than your mortgage payment, you can even pay additional towards your principal mortgage balance and pay off your mortgage early.
How To Use The Mortgage Affordability Calculator
To use our mortgage affordability calculator, simply enter you and your partners income , as well as your living costs and debt payments. The calculator can estimate your living expenses if you dont know them.
With these numbers, youll be able to calculate how much you can afford to borrow. You can change your amortization period and mortgage rate, to see how that would affect your mortgage affordability and your monthly payments.
Claiming Rental Income To Qualify For A Mortgage: How Do Lenders View It
See Mortgage Rate Quotes for Your Home
As a landlord or aspiring real estate investor, its possible that a lender will let you use rental income to qualify for a mortgage. Whether they actually do so will depend on your ability to provide proof of income, or if it’s for a new rental, proof of the earnings potential of the property. Lenders have to adhere to specialized guidelines when making their decision. Read on to learn more about these stipulations, as well as how they may impact your eligibility.
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What Is My Mortgage
If you have more debt, you might struggle to keep your DTI low while also paying off a mortgage. In this case, it can be useful to work backward before you decide on a percentage of income for your mortgage payment.
Multiply your monthly gross income by .43 to determine how much money you can spend each month to keep your DTI ratio at 43%. Youll then subtract all of your recurring, fixed monthly debt obligations and minimum payments on credit cards and other lines of credit. The dollar amount you have left after subtracting all of your debts lets you know how much you can afford to spend each month on your mortgage.
Lets take a look at an example. Imagine that your household brings in $5,000 in gross monthly income. Your recurring debts are as follows:
- Rent: $500
- Minimum student loan payment: $250
- Minimum credit card payment: $200
- Minimum auto loan payment: $200
- Homeowners association fees: $100
In this example, your total monthly debt obligation is $1,250.With quick math, we find that 43% of your gross income is $2,150, and your recurring debts take up 25% of your gross income. This means that if you want to keep your DTI ratio at 43%, you should spend no more than 18% of your gross income on your monthly payment. Use a mortgage calculator and your estimated monthly payment to calculate how much money you can borrow and stay on budget.
First: What Is A Mortgage Payment
Mortgage payments are the amount you pay lenders for the loan on your home or property, including principal and interest. Sometimes, these payments may also include property or real estate taxes, which increase the amount you pay. Typically, a mortgage payment goes toward your principal, interest, taxes and insurance.
Many homeowners make payments once a month. But there are other options, such as a twice a month or every two weeks.
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The Bottom Line: How Much Home Can You Afford
So, what percentage of your income should go toward your mortgage? The answer will vary depending on your income and how much debt you have. But your income is only one of the many factors that determine how much home you can afford. Lenders look at everything from your credit score to your liquid assets when they decide how much to offer you.
To learn more about how much of a mortgage loan you can afford to borrow, check out our home affordability calculator. If youre ready to get started, you can apply online or give us a call at 452-0335.
Front End Debt To Income Ratios
Debt to income ratios are calculated as follows:
For front end debt to income ratios, also known as the housing debt to income ratios, it is the following:
- the monthly principal
- homeowners insurance
- homeowners association fee
take the sum of the above and divide by the borrowers, or borrowers, total monthly gross income.
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Consider Mortgages With Low Aprs
Consider mortgages with very low APRs if you want to use only your passive income to make your mortgage payment. These mortgages would include ARMs or adjustable-rate mortgages and interest-only mortgages.
ARMs:
This can be a good idea if you dont plan to stay in your new house very long. These low adjustable-rate mortgages have the interest rate locked for a certain number of years. After that, the interest can adjust up or down depending on what rates are doing when its time to refinance your mortgage.
Interest Only Mortgages
An interest-only mortgage can also make sense when you are planning to sell your house soon. These mortgages can also be good options for people who cant qualify for a regular 30-year fixed-rate mortgage because they dont have enough income or money in the bank.
However, these mortgages can be risky as there is no payment reducing principal during those years, and your loan can end up costing more than if you had bought a traditional type of home loan.
Take A Longer Mortgage Term
The longer your mortgage term, the lower your monthly payment. If you take a longer term, you spread your payments over a larger number of months and years, which reduces the amount youll owe each month. While taking a longer term will increase the amount you pay in interest over time, it can free up more cash to keep your DTI low.
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General Income Qualification Requirements
Likely, youre not qualifying for a mortgage based on investment income alone.
If thats the case, youll have to document any other income streams being used for mortgage qualification.
Regardless of the type of income, Fannie Mae instructs lenders to look for income that is stable, predictable, and likely to continue.
- For mortgage borrowers who earn a salary or regular wage, that requirement is generally not difficult. Paystubs and W2s are usually all thats needed to document their income history. And, their employer can usually assist in verifying the likelihood of continued employment
- For self-employed workers, documenting income can be more challenging. Still, bank statements, profit and loss statements, and previous years tax returns are typically a good indication of stability and predictability of continued income
When it comes to income generated from your investments, the rules are a little more complex.
Unlike the income from a job, you cant rely on pay stubs or W2s. Nor can you reach out to an employer for clarification.
That means youll have to jump through a few extra hoops to document the source and stability of your investment income.
The Annual Salary Rule
The ideal mortgage size should be no more than three times your annual salary, says Reyes.
So if you make $60,000 per year, you should think twice before taking out a mortgage that’s more than $180,000. However, if you have a partner, and your combined income is $120,000, you can comfortably increase your loan amount to $360,000.
That’s not to say you should always opt for the most expensive mortgage you can qualify for. If you settle on something below your max, you’ll have more wiggle room to put money into a savings account or pay for other costs like home renovations.
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What Is Passive Income
To know if passive income can be used for mortgage qualification, you first need to understand what it is. Passive income can be many things. It can come from rental properties, stock dividends, or something similar. While passive income can help supplement your overall earnings, not all lenders allow it to be used in the qualification process.
Instead, lenders want to ensure that you can support your loan and maintain a stable career for at least 2-3 years before applying. You dont necessarily have to be at the same job for three years, but you should be employed in the same industry at a minimum if you have switched positions.
When Is Rental Income Accepted For Underwriting
If you already own the rental and can document the income that came from it, your income is considered real rather than projected by the lender. Real rental income will be considered by underwriters.
A bank could look at two years of your tax returns to see how much proven income has been generated from your leases.
For your personal tax returns to be sufficient per Fannie Mae youll need to file IRS Form 1040, Schedule E. If you file a business tax return, youd fill out the Rental Real Estate Income and Expenses of a Partnership or an S Corporation form, which is also known as IRS Form 8825.
Fannie Mae will also likely require that an appraisal report is conducted to estimate the propertys market value. If you have a one-unit rental property, this will require having an appraiser fill out a Single-Family Comparable Rent Schedule . For two- to four-unit properties, the appraiser should fill out Form 1025 the Small Residential Income Property Appraisal Report.
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How To Qualify For A Mortgage
8-minute read
*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
Are you ready to make the jump from renting a home or apartment to owning a home? The first step is applying for a mortgage, but how can you tell ahead of time if youll qualify?
Well introduce you to some of the factors that lenders look at when they consider mortgage applications. Well also share a few tips to make your application stronger.
Canada Emergency Response Benefit
Within the recent crisis across the world, many people have been left to file for unemployment. For some, they may have simply been furloughed. This is when the employee is given temporary leave from the employer. Usually due to changes in the economy and will return to work at a later time. Others may have been laid off, where the person is permanently let go from their job. To help provide support during this time, Canadians can apply for the CERB as a temporary source of income. This provides relief to those that have stopped working because of COVID-19.
Although, those that have applied for CERB may not be able to use this as a source of income when looking to apply for a mortgage. Lenders might not see the CERB as a reliable source of income, which means you are seen as a higher risk for a lender. Their income has more variability and the CERB is intended as a temporary source of income during a crisis.
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The Monthly Income Rule
If you want to focus your search even more, take the time to think about your monthly spending. While the Consumer Financial Protection Bureau reports that banks will qualify mortgage amounts that are up to 43% of a borrower’s monthly income, you might not want to take on that much debt.
“You want to make sure that your monthly mortgage is no more than 28% of your gross monthly income,” says Reyes.
So if you bring home $5,000 per month , your monthly mortgage payment should be no more than $1,400.
“With a general budget, you want to have 50% of your income going toward utilities, mortgage and other essentials,” says Reyes. Keeping your mortgage payment under 30% of your income ensures you have plenty of room for the rest of your needs.
Other Mortgage Qualification Factors
In addition to your debt service ratios, down payment, and cash for closing costs, mortgage lenders will also consider your credit history and your income when qualifying you for a mortgage. All of these factors are equally important. For example, even if you have good credit, a sizeable down payment, and no debts, but an unstable income, you might have difficulty getting approved for a mortgage.
Keep in mind that the mortgage affordability calculator can only provide an estimate of how much you’ll be approved for, and assumes youre an ideal candidate for a mortgage. To get the most accurate picture of what you qualify for, speak to a mortgage broker about getting a mortgage pre-approval.
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How Does Rental Income Work For A Mortgage Application Calculation
How your rental income is calculated when you apply for a mortgage depends on the documentation that was used to support it.
How does rental income work with federal tax returns
Before calculating qualifying rental income, federal tax returns must be used by the lender to add any expenses to the borrowers cash flow. Nonrecurring property expenses can be added back, provided they are documented.
The income is then averaged over the number of months the potential borrower used this property as a rental unit in the previous tax year.
How do you calculate rental income with appraisals and leases?
The Beverly Hills Mortgage Broker will use a portion the projected income to calculate leases and appraisals. They typically use 75% and 25% for projected vacant spaces.
What does the rental income contribute to DTI?
Lenders will consider your debt-to-income ratio when deciding whether or not to approve your loan application. It is simply the sum of your monthly recurring debt divided by your monthly income.
Beverly Hills Mortgage Brokers will typically look for a ratio less than or equal 43%. The better your ratio, however, is.
Lets take, for example, a $5,000 gross monthly income. Your mortgage payment is $1,000. You also have a $300 student loan payment, $300 car payment, and $200 minimum credit card payment.
This is how the math would look:
/ $5,000 = 0.36
Your debt-to-income ratio in this scenario would be 36%.
What does your rental income do to your cash flow?
Get The Seller To Carry A Note
A seller can also carry a note on your real estate investment if they cant sell it. You can get approved for this kind of mortgage and be paid back over time with interest like any other loan. This can also help you ease into the credit requirements needed when taking out a traditional mortgage in the future.
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Social Security And Pensions
You might not think that you’ll be applying for a mortgage loan after retirement. But people do. And when they do, they can use their Social Security payments and pension payments as part of their regular monthly income.
Lenders can’t deny borrowers based on their ages. If a mix of Social Security or pension payments plus other monthly income gives you enough dollars each month to fall under that 43 percent threshold, you have as good a chance as anyone of qualifying for a mortgage loan, assuming that your credit score and other factors are solid.
The Percentage We Recommend
At Rocket Mortgage®, the percentage of income-to-mortgage ratio we recommend is 28% of your pretax income. This percentage strikes a good balance between buying the home you want and keeping money in your budget for emergencies and other expenses. However, its important to remember that you dont need to spend up to your monthly limit. Think of 28% as the maximum amount you should spend monthly on your total mortgage payment. Remember to include your principal, interest, taxes, insurance and homeowners association dues in your total before you sign on a loan.
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Find A Renter And Execute A Lease
Research rent values, advertise your property, and find a renter to lease your property. Youll provide the lease and proof of the security deposit to the lender as part of your qualifying for the new home loan.
Keep in mind, too, that you need to execute a lease and collect a security deposit before the mortgage contingency expires.
Do I Need To Find A Tenant And Have A Written Lease Agreement Before I Apply
Regarding the potential rental income the market rent is determined by the appraiser, not by the amount on a lease . The appraiser will include one of the following:
- For a one-unit property – Single-Family Comparable Rent Schedule .
- For two to four-unit properties – Small Residential Income Property Appraisal Report with your appraisal report.
The appraiser will list the fair market rent for the subject property on these forms.
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Cfpb Shifting From Dti Ratio To Loan Pricing
Both Fannie Mae and Freddie Mac have allowed higher DTI ratios for buyers carrying significant student debt.
While measuring debt-to-income is useful for getting a baseline feel for what you may qualify for, the CFPB proposed shifting mortgage qualification away from DTI to using a pricing based approach.
What Change did the CFPB Propose?
“the Bureau proposes to amend the General QM definition in Regulation Z to replace the DTI limit with a price-based approach.”
Why Did They Suggest the Change?
“The Bureau is proposing a price-based approach because it preliminarily concludes that a loans price, as measured by comparing a loans annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumers ability to repay than DTI alone.”
How Does This Impact Loan Qualification for Low-income Buyers?
“For eligibility for QM status under the General QM definition, the Bureau is proposing a price threshold for most loans as well as higher price thresholds for smaller loans, which is particularly important for manufactured housing and for minority consumers.”
