PROOF OF INCOME
We are listing 4 different types of income that had been available. Due to the current circumstances, the banks have eliminated most of these programs. Please check with your Mortgage Broker/Lender for available programs.
Full Documentation: This refers to your ability to substantiate how you receive your income. For example, current pay stubs, and 2 prior years W-2, 1099, Tax Returns, etc. and proof that your current form of employment will be continuing in the foreseeable future are all forms of documentation.
Bank Statement: There are some individuals and small business owners who make an income but it is difficult to provide documentation to that effect. For those individuals the lender will use their bank statements for a period of 12 months and arrive at an average of the deposits made to the account to determine income. Of course, this factor is riskier than the former.
Stated Income: This is the riskiest income of all to the lender. These individuals work but their income is difficult to prove and is derived from a variety of sources such as: self employment, tips and cash sales. Many do not keep proper records but they pay their bills on time and the credit report reflects the timeliness of their payments.
No Documentation: Individuals are able to secure a mortgage based solely on their credit score. If credit is so good, the lender felt that if someone was able to manage their credit in such an efficient manner, then they would be able to pay their mortgage in the same way. The trend of thought is that past performance in paying one’s debt would be a good indication as to the future.
DEBT RATIO
A Debt Ratio is a percentage of income the lenders will utilize to determine the maximum spending on Housing Debt (Top or Front Ratio) as well as Total Debt (Bottom or Back Ratio) which includes monthly Housing, Car, Installment Loans and credit card payments. If you are above their threshold for ratios, then the loan develops into a greater risk and may be declined.
Different loan programs have different debt ratios. The Federal National Mortgage Association (FNMA) has its own debt ratio and Federal Housing Authority (FHA) has another set of debt ratios. These ratios are 28-29 top/front ratio and 36-41 the bottom/back ratio respectively.
In order to calculate your debt ratio you will have to compute your income on a monthly basis.
For example, if you are paid weekly:
(a) Multiply your weekly gross salary by 52 (weeks) and then divide that figure by 12 (months). $500 per week-your monthly income would be $500 x 52 ÷ 12 = $2,166.66
If you are paid on a bi-weekly basis:
(b) Multiply your bi-weekly gross salary x 26 then divide by 12, therefore, $500 bi-weekly = $500 x 26 ÷ 12 = $1,083.33
If you are paid twice per month:
(c) Multiply your twice per month gross salary by 24 and divide it by 12, therefore $500 twice per month = $500 x 24 ÷ 12 = $1,000
Next, having determined the purchase price, you will deduct your down payment and then the balance will be the mortgage loan amount you require.
Let’s use the following example:
You are buying a house for $120,000.
You have a down payment of $20,000
You will be applying for a mortgage of $100,000.
Taxes = $2,400 per year = $200 per month
Insurance = $3,600 per year = $300 per month
Maintenance/Homeowners Association = $300 per month
(Homeowners Association (HOA) generally handles Insurance coverage. If they do, you will not have Insurance in your calculations. We will use an HOA as our example.)
You will now have to calculate the Principal and Interest on the mortgage loan amount
For example, if you were earning $4,000 a month gross income, and you are purchasing a $100,000 house with a mortgage @ 6% for 30 years, the principal and interest will be $599.55. (See Calculators To that figure of $599.55 add your taxes and insurance and homeowner’s association fees all on a monthly basis.
Then your monthly mortgage payment would be:
$599.55 + 200 + 300 = $1,099.55 = PIT(no I) + HOA
Note: We did not place a figure for Mortgage Insurance (MI) because of the varying costs associated with it please see your Mortgage Professional for an accurate figure. See Insurance for an explanation of MI.
Top/Front Ratio: PITI/HOA/MI ÷MONTHLY INCOME =
$1,099.55 ÷ 4,000 = 28% Top/Front Ratio
Bottom/Back Ratio:
Mortgage Payment = $1,099.55 per month
Car payment = $200 per month
Credit Cards = $100 per month
Student Loan = $60 per month (installment)
PITI/HOA/MI + car payment + credit card payment + Installment loan ÷monthly income =
$1,099.55 + 200 + 100 + 60 = $1,459.55 ÷ 4,000 = 37% Bottom/Back Ratio