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.

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.

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.

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.

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.

It is important to be sure that the home buyer does not deposit a large sum prior to purchasing the home. If a large sum is, in fact, deposited he or she must be able to explain where the money originated from. The lender will use the recent statements that the home buyer provided to observe the mean balance over an unmitigated amount of time. The lender must examine the average bank deposits from the most recent statements; if he or she notices an irregular amount that is deposited then he or she must be sure of where that money came from before approving the loan. Without a proper response from the home buyer, the lender will most likely not continue on to approve the loan. The issue also deals with responsibility. The lender has reason to disapprove the home buyer’s loan if the large sum came from an illegitimate or unknown source because the loan might not be in responsible hands.

Your debt ratio is represented as two numbers, based on your gorss montly income. The two numbers consist of your housing ratio which is your housing payments that include tax and insurance costs, which is also known as the front end. The back end would be your second ratio also known as your total debt. This is calculated by your housing ratio added with your debt on bills and credit reports divided by your gross monthly income.

An example would be of a loan with 5% down and some common front and back end ratios would be 28 and 36. Your gross monthly income is 5,000 dollars which is what you make before taxes and any witholding that might concur. We will use the housing ratio of 28% and thus 28% of our gross monthly income will be $1,400. You subtract various things that are considered your “allowables” which can be insurance bill and monthly tax payments. So for this example we will be left with $1,115 for our principal payment and interest payment. For a 30 year fixed payment with a 7% rate, the loan amount will calculate to roughly 168,000. This is what you’re preqaulified for, so expect to get atleast this much when you’re seeing your lender.

To calculate your back end ratio, it shows items that are on your credit reposts such as any loans, such as car, and student, and credit card payments. Lets say that for all our loans and payments combined equal $650, our debt would be the $1,400 plus the $650 which would give us $2,050. When we divide this by our gross monthly income, we get roughly 41% which would make our ratio 28 to 41, for front and back end ratios respectively.

As said earlier, you may be preqaulified for a loan of $168,000, this isn’t necessarily a bad thing. This does not limit your home to one that cost within that range, you can still afford a house that may cost double or even ten times that, but then you’re going to need the rest as a down payment. So, it may not be realistic, but be aware that your options are not limited.

Another concern is that some home buyers do not pay attention to how liquid their assets are. This means that even though an account is present, such as a retirement account, the home buyer may not have access to it. A retirement account will have no value until one is retired. For the purpose of financing, the home buyer may cash that account. Another option is to allow the lender to use a partial amount that can be included in the assets.

Although some types of accounts will let the owner cash in, it is for a penalty. For example, the home buyer has $50,000 in his or her retirement account and wishes to cash in. The lender will consider the penalty of this action; let’s say, 10%, and deduct that from the account. So in actuality, the account is only worth $45,000. It is suggested that the home buyer talk to a financial planner about this decision. If the home buyer does not decide to cash in their account then that asset can still be used to qualify them for a home loan. The lender will most likely use 70% of the home buyer’s vested balance. The vested balance is the portion of the 401k that one is currently entitled to.

The very last asset requirement for loans is called reserves. The reserves are the funds that are there when the home buyer closes his or her purchase. It is usually in multiples of the house payment. Retirement accounts by itself can be used as reserve assets.

Being prequalified means absolutely nothing to securing the final loan until all sources of income are verified. Consider this as fancy speak that you are not wasting their time by being prequalified as a potential home owner.

Every one or two years, the county collects property taxes and since you have an escrow account, your property taxes are automatically paid by your lender.  The escrow account works like a piggy bank.  You put in money every now and then, little by little.  Then when you need the money, it’s already saved up and ready to pay the taxes.

Mortgage lenders are very nervous when you have less than 20 percent down.  They do not want to worry about you paying your taxes on time.  This is because if the taxes are not paid, tax lien wills emerge under your title and your home can be sold out under your lender if the tax lien drags on.  An escrow account is an extra insurance for the lenders.

Lenders sometime even pay you to get an escrow account even when it’s not required.  This is called an “escrow waiver” fee.  When borrowers have more than 20 percent down, lenders will usually give them a ¼ point discount if they set up an escrow account.  On the other hand, if you refuse, the lender will charge you an extra ¼ point.

Federal law requires that when an escrow account is set up, not more than two months of property taxes plus fifty dollars could be in the account.  This is called the “cushion,” in case property taxes increase.

Your local appraisal district will determine your property taxes.  By the way, if your home is newly built, then the valuation may be done when it was just raw land.  If so, your property taxes would need to be updated because the taxes will be for the improved value, not just the land.

Are escrow accounts good or bad?  It is neither, but mortgage lenders love them.  It gives them extra insurance that would allow them to be more care free.  It is really a personal opinion.  If you like to invest then you probably would not be content to have an escrow account that would lock up some fund.  But if you like to save up for your property taxes then an escrow account is the way to go.