Income and Assets

Gathering Documents

It’s time to get your documents together. You need paperwork to prove your income, to show your mortgage loan officer that you can afford the home you want, and buy the house. There are several ways to go about this:

Full Documentation

Full documentation means that you have proof of everything — income and assets — that you’ve put down on your application. For your earning history, that means:

  • 2-years of W2 statements
  • 2-years of tax returns

Your loan officer also wants to see you still have the job, and that your income is going to continue to remain dependable and stable. To show this provide:

  • Pay stubs for the last 30 days
  • Documentation for other income like bonuses, alimony, etc.

You should also expect to provide proof that you have cash set aside for some large upfront costs:

  • Funds for a down payment
  • Funds for closing costs
  • Funds for 6–12 months of cash reserves, in some cases

Proof of assets? Bring:

  • Last 2 months of bank statements (all pages)
  • Investment portfolio statements
6 or 12 Months of Bank Statements

This might be an option for those borrowers whose income is derived from their assets. You won’t show W-2 statements or pay stubs (since you likely won’t have them), but you’ll provide six months’ to a year’s worth of bank statements. It goes without saying these would be pretty impressive bank statements. The lender would determine your qualifying income by averaging out your statement balances.

How to Prove Income

You’ve got an income? Prove it. You may feel like your lender is asking a lot of you during the application process, but once you break it down, proving your income isn’t too complicated.

What Counts as Income? This is easiest for salaried workers. Your salary will be what lenders look at to make sure you have enough money to afford a home. Non-salary sources of income work, too. Provide proof of income from a second job, side business, social security benefits, pension payouts, child support, and more.

Verifying Your Employment

If you are employed by a company, the lender will check your W-2s and verify employment by speaking with your company. If you’re self-employed, your tax returns will be required and your CPA may need to provide additional information.

Checking Back, Looking Ahead

Lenders want to see a consistent history of your earnings. This could mean two years of consistently high W2 statements and tax returns for the same position. You could also show positive career trajectory that has resulted in a steady current income. On the other hand, a declining or volatile income history looks risky to lenders.

Taxable Income Requirements

Not all money can be counted as income. Lenders focus on taxable income, which can trip up salaried workers and self-employed business owners who claim expenses. For example, if you’re a self-employed web developer, you may have unreimbursed travel, mileage, parking, or etc. This earns a nice tax write-off, but reduces the income that can be included on your mortgage application.

The Stated Income Loan

A SIVA loan (stated income, verified assets) lets a borrower state their income without verification, but show proof of cash assets with bank statements. A SISA loan (stated income, stated assets) is what it sounds like — a lender would not ask for verification of income or assets. These loans are tough to get. You’ll need employment proof or a letter from your CPA. If you’re approved, your interest rate may be a half-point higher, with a more sizable down payment.

What Can I Afford?

Making a Rough Estimate

First things first, you can do some very simple math and get a rough estimate of what you can afford. In general, a prospective buyer could likely afford a home that costs 2 to 2.5 times their annual gross income. If you bring in $80,000, that’s a house that’s between $160,000 and $200,000. This estimate leaves out whether or not you can make a 20% down payment, have good credit, and importantly, what other expenses you need to keep up with.

Debt-to-Income Ratio

Speaking of those other expenses, you’ll need to know your two debt-to-income ratios — what percentage of your monthly income would hypothetically go toward your new home payments and those housing expenses plus your other ongoing expenses. As far as lenders are concerned, these numbers play a big role in what you can afford.

A front-end debt-to-income ratio looks at how much of your monthly income goes toward your housing expenses. Lenders add up a home loan’s principal, interest, taxes, and insurance and divide it by your gross monthly income. It’s ideal if these home loan costs don’t exceed 28% of your gross income, but many lenders will be okay with a higher number.

A back-end debt-to-income ratio throws several more expenses into the mix. These other expenses could include credit card payments, car payments, student loans, and more. That obviously means this ratio is going to be a higher portion of your gross monthly income. Still, lenders don’t want this number to be too high. Ideally, most lenders want to see this number below 36%, though many would accept a borrower with a ratio below 45%.

Take Some Detailed Calculations

Getting an accurate figure for your debt-to-income ratio may take some work. Your gross income isn’t just your salary. Wages, bonuses, investments, dividends, alimony, and other sources of income should be factored into your gross monthly income estimate, too.

When you calculate your monthly expenses, factor in the minimum payment due for credit cards, your monthly car payments, student loan payments, alimony payments, and other recurring expenses.

Your Lender’s Requirements

Lenders may suggest an ideal ratio for a borrower, but when it comes to upper limits, there are strict requirements for your debt-to-income ratio.

You’ll often see these DTI limits expressed as 30/45, meaning your mortgage payment (principal, interest, taxes, and insurance) can’t exceed 30% of your monthly gross income and your housing expenses and other monthly debts together can’t exceed 45% of your monthly gross income.

The debt-to-income limits of different lenders may vary slightly, but for each lender these limits are non-negotiable.

What else?

While a lender’s DTI limit may be fixed, there are moves you could make to bring your ratio down. For instance:

  • A higher down payment would reduce your monthly housing expense, lowering your ratio.
  • Paying a car or credit card balance off early would help your back-end debt-to-income ratio.
  • Even securing a lower interest rate would help by reducing your monthly mortgage payment and lowering your ratio.

Lastly, just because you can afford to buy x amount of house, doesn’t mean you should. You might become “house poor” — meaning you’ve got a great home, but not much money for anything else.

Confused? We can break it down for you.

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