July 16, 2009
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Bonuses are a determining factor on the mortgage loan amount you can take out. However, it is very limited because bonuses have to meet strict requirements in ordered to be counted as steady income when applying for a loan.
The bonuses must be consistent throughout your documented tax returns. Several questions to consider is the frequency of the bonuses. Is it paid annually, quarterly, or even monthly; and what are you likely to be spending the bonus on? If the bonus frequency is applicable to your gross income, the lenders will help you secure the mortgage loan without making you jump through hoops. However, if your bonus is unpredictable then it’s harder to approximate the mortgage loan amount available to you. The last thing a lender wants to see is you not receiving a bonus for some reason, and then fall behind on monthly mortgage payments. All of a sudden, your mortgage loan becomes a risk of defaulting where the lenders might never collect the full amount of the original funds appropriated to you.
You should not factor in bonuses into debt ratios or additional income without proof of consistency. These can include paychecks, or letters from employers indicating how often future employee bonuses are paid. It varies from person to person, and job to job. Some jobs are heavily dependent on bonuses while others are not. The only way to make sure a bonus applies towards your mortgage loan amount is to talk to lenders and qualify your bonuses as documented steady income.
Lenders will also note that if you’re using your bonus to pay off bills and mortgage payments (aka in the lending industry as debt service), then they are willing to factor in the bonus to determine the mortgage loan amount that you can repay in the future. It’s a different story if you’ll be blowing your bonus on a boat or luxury vacations. Lenders actually want to offer you a bigger loan where they can make more money in return. Use this knowledge to your advantage, because well documented bonuses and your commitment to debt service can influence the loan amount that lenders will approve.
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There are risks involved in securing mortgage loans that apply to both the borrower and lender. The lending companies expect you to repay the loan back with interest. In order for mortgage lenders to have confidence in your ability to pay them back, they review job history and hourly wages closely.
To calculate hourly wages, the mortgage lender uses your pay stub to determine how much you get paid per hour then multiply that amount with the amount of hours you work daily to determine the weekly pay. They then multiply it by fifty-two because there are fifty-two weeks in a year. After they get the product of the two, they divide it by twelve (twelve months in a year) and the quotient or outcome is your hourly wage.
Keep in mind that the lender would like you to be a full-time worker, which is a minimum of thirty-six hours per a week, and would like to have a pay stub or a W-2 form as proof. If you get paid in cash, there are several steps you need to take in order for the lenders to calculate your hourly wage. Your first option is to get written verification of income from your employer and the amount they have paid you year to date. The second option is if you get paid in cash and is unable to get a stub or a W-2, you will have to deposit your pay into your bank account with similar amounts at a pattern that such a lender is able to determine your hourly wage. After you acquire a record pay then you can withdraw the money. Most lenders prefer having a paycheck stub or W-2 because proof of cash payments is long and tedious.
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The most common myth is that people believe overtime can increase the amount of money that a lender is willing to loan you. This is both true and false because in order for overtime to count, there has to be certain criteria’s that you need to meet. If a person has been doing overtime for the last few months just to increase the amount of income they make per month, they most likely believe that they can show that as their gross monthly income, and expect lenders to give them a higher loan. The only problem is that lenders need to see consistency in this overtime. Meaning that a person who uses overtime in their overall income, needs to obtain overtime for at least a year or two, consistently, rather than on and off. The reason being is that lenders want to count the income that is stable, rather than income that can change over time. When jobs are seasonal and business is slow, there may be no overtime and that lowers your income even though you put down you had a higher income, which increase your loan and payments. Without that extra overtime income, you have a possibility of falling behind on your income, so most lenders like to disregard overtime unless it’s consistent.
When overtime is used correctly, it can help you obtain a higher. For example, you make $800 a week, by calculating your debt ratio and using a 28% front end ratio, over a 30 year fixed rate of 7%, you are qualified for a loan of $123,000. Now if you have overtime on this, let’s say around $300 more, you can calculate your debt ratio with the same factors, and you are qualified for a loan of $170,000. Overtime does help with the loan, as you can see, but the only problem is that the overtime has to be consistent.
If you wish to include your overtime in your income when applying a loan, your loan officer will need to match up your W-2 forms to make sure that the overtime is consistent. Also they may have your boss vouch that you have done consistent overtime, and that in the future you will have the opportunity to continue overtime.
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Documenting Income depends on different things such as how you’re employed and what kind of job you have. The determining factors are how you’re paid and the type of employment you have will be important to what type of documentation you will need to provide to the lender. Another thing that is important is how much you’re trying to get approved for. If you’re asking for a very high loan compared to a more moderate one, lenders will need to have more information about your employment status. To avoid wasting time and effort, be aware of what you need to give to your lender. You won’t have to fuss with getting the right forms done and doing things that may be unnecessary.
When applying for a mortgage, try to anticipate what you need to do. Anticipating will only help you in the future, because you’ll have less work to do. You can’t be so optimistic about your loan, try and understand the possible down sides to what could happen, to prepare yourself for any unexpected setbacks.
Once again, depending on your employment your documentation will be different. The reason they ask for documentation is simply because they need proof of your income, so when they give you a loan they are at least comfortable, knowing that you have the money to make the payments. For jobs that have different income sources such as those that are “off the books” or those that are not factored into your total monthly gross income, you will need a third party to verify your earnings. This can be done through a boss or an accountant with the company, or someone who can vouch for your earnings.
To prepare yourself for applying for a mortgage to obtain your new home, some things that the lenders may need will be your most recent W-2 forms, documentation of your bank and retirement statements, and any other source of accessible income.
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Debt Ratios do play a large role when you’re applying for a loan on your new home, and at the same time they don’t. For every loan program there is a debt ratio guideline that the loan person can follow. Loan officers, who are well trained and have been doing this for years, understand that these are just guide lines and that they aren’t set in stone. Your loan officer should take the time to customize and make a plan with you in mind, rather than a guide line that is pre-made.
A large part of what you can borrow is what you feel comfortable with. If your rent is around 2,000 now and you’re more than comfortable paying that as your monthly rent, then you can by all means start from there. If you’re struggling from pay check to pay check just to make the 2,000 you currently have, then that’s a sign to start lower. If you are more than certain you can pay over what you’re currently paying, then take the chance and start from there. Another way you can determine your loan amount is through something called payment shock. Let’s say you’re paying $1,500 for rent now, and then you would have a payment shock of 150% which would make it $2,250. This payment shock is the difference between what you currently pay, and what you would need to pay. They do this as a test to see if you can pay off a loan, they usually test this on people who are bordering on the loan.
If you’re not sure about how much you’re willing to spend or can spend, talk to your loan officer. That person will be able to give you your front and back end ratios, and from there you can plan what houses might be more suitable for your budget and loan.
The best thing to do is not decline your own loan application because of the high debt ratios. Many people think that just because of these numbers, they should forget their ideal home. That’s not the case, these are only numbers and if you work with your loan officer, you can possibly get around it and find a plan that works for you. Things that matter most are that you feel comfortable that you can make those payments, you are able to give a good down payment, and your credit history is on track.
