Welcome back to my series, “Understanding Financing.” Let’s turn to income. Lenders will want to see your pay stubs, W2s, and tax returns for the last two years. Are you a W2 employee or self employed? If you are self employed, you will need to show two years of income. Lenders will then average them and that number will be used as your income. It also can take longer to do your background check, so talk to your lender sooner in the process. (Learn more about what income is considered at Discover.com.) Do you earn commission? If you earn at least 10% of your base in commission, you may need to go through the self-employed screening process, so talk to your lender sooner to confirm.
Is your income eligible? You must be employed in the US and be a citizen, permanent resident with green card, or here on an H1 visa. You must be eligible to work in the US and have a social security card. If you are here on a student visa or temporary visa, you may not be eligible. You do not have to be a citizen to purchase real estate! We are discussing financing a real estate purchase in the US with a US lender. (Read more about getting a mortgage for Non US Citizens on Investopedia.)
Your income number is important, especially for your debt-to-income ratio. Lenders want to see a max 40-45% debt-to-income ratio. That means that your debt payments every month need to be 40% or less of your income for the month. (Read more about debt-to-income ratios at the Mortgage Reports.) Your student loans do count! Even if you are in deferment, 1% of your outstanding balance or the monthly payment amount counts as a debt.
Lenders are also going to look at your assets. Do you have the assets to cover the down payment and closing costs? Where are these funds coming from? Will any portion of the funds be coming as a gift? If you are getting a gift, you will need to show the account statement that the money is coming from and going to and you will need to provide a gift letter stating that it is a gift and a copy of the check.
You want your assets to be seasoned. Put the money you will use into your bank account and let it sit there for 30-60 days to “season.” You don’t want to move funds during your loan process. This can cause you to have to provide new statements and account for the money that has been moved. Also, you want to avoid receiving large checks in these accounts that are atypical or will need to be sourced. Talk to your lender to make sure you have all of the funds in the correct locations.
Do you have reserves? Some lenders may need to see reserves for 6-12 months of mortgage payments. This money doesn’t necessary have to be liquid. For instance you may need to show those funds in your 401k if you have a loan amount over $417,000. Ask your lender for details. (Read more about assets at the Truth about Mortgage).
That concludes this topic. Next week I will discuss the main loan products that most buyers use to purchase real estate – conventional loans, FHA loans, and VA loans. And the week after, I am excited to have Rich Godbout of Caliber Home Loans discuss the importance of getting pre-approved and some of the documents you will need to share with your lender. Stay tuned!