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Income Requirements For A Mortgage Approval

Required Income Documentation For MortgageIncome Requirements For a Cape Cod Mortgage

Debt-to-Income (DTI) is one of the many new mortgage related terms many First-Time Home Buyers will get used to hearing.

DTI is a component of the mortgage approval process that measures a borrower’s gross monthly income compared to their credit payments and other monthly liabilities.

Basically, mortgage lenders use a DTI Ratio to determine whether or not a borrower can afford to pay the home loan back and are designed to give guidance on acceptable levels of debt allowed by particular lenders or programs.

The first step in securing a home purchase loan is to complete a loan application. In this process, you will need the following documents:

  • Pay stubs (past 2-3 months)
  • W-2 forms (past 2 years)
  • Any information on long-term debts
  • Any recent bank statements
  • Tax returns (past 2 years)
  • Proof of other incomes, if any
  • The address and description on the subject property
  • The sales contract

Remember, the DTI Ratios are based on gross income before taxes. Lenders also prefer to use W2′s or tax returns to verify income and employment.

However, the adjusted gross income is used to calculate DTI for self-employed borrowers on most loan programs. Since there is room for interpretation on these guidelines, it’s important to review your personal income / employment scenario in detail with your trusted mortgage professional to make sure everything fits within the guidelines.

During this application process, the lender will be able to order a report on your credit history along with an appraisal of the property that you wish to purchase. This process can take anywhere between 2-6 weeks.

Two Types of DTI

There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender / mortgage program guidelines.

Most loan programs allow for a Total DTI of 43% and a Housing DTI of 31%.

Two Types of DTI Ratios:

a) Front End or Housing Ratio:
Should be 28-31% of your gross income
Divide the estimated monthly mortgage payment by the gross monthly income

b) Back End or Total Debt Ratio:
Should be less than 43% of your gross monthly income.

Frequently Asked Questions

  • Q

    Is my second job income taken into consideration when the lender reviews my application?

    They usually do consider it if it is at least a total history of 1 year and if it is verifiable.

  • Q

    Do I have to include information for child support or alimony?

    Yes. Banks will take your monthly child support or other financial obligations into consideration with your DTI Ratio.

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