Increase Mortgage Loan Amount with Your Bonus

July 16th, 2009

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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Calculating Debt Ratios

July 15th, 2009

Calculating your debt ratio is pretty simple. It’s nice to know it because if you’re buying a home, or plan to in the near future, you can roughly figure out how much a potetnial lender will be willing to let you borrow.

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.

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Debt Ratio

July 14th, 2009

Debt Ratios is more than likely, the most significant and important aspect of lending to date. A Debt Ratio is defined as the percentage of debt compared to you gross income. In order to have a Debt Ratio of 20, your bills and required spending for a month must be equal to 20% of your gross income for that month. Every lender will have a varied debt ratio, depending on different factors.

Lenders have a hard task to face when calculating and basing a loan on your debt ratio. Lenders of course, would like to give you the biggest loan they can because the interest will be larger. The interest coming back on an $80,000 loan will be larger than a $40,000 loan, and even though it would profit them, there is still the chance that the borrowers won’t be able to pay back the loan. If the lender gave a higher loan, the monthly payment for the loan may be too great for the home owners and due to non payments; they may have to foreclose the home.

The task of the lender is to find a common ground in between these two. While making sure they give a loan sufficient enough to help the borrowers, they need to make sure that it’s a safe investment and that they will be able to pay back the loans. So overall, it’s the largest loan possible within the parameters of the loan being paid back in a timely manner. Once again, it’s also dependant on what the lender is comfortable with, if they believe that the borrowers will be able to pay back a higher loan, then they may take the risk, every lender is different. Lenders have to use the debt ratios and determine which loans go along with which debt ratios in order to make sure the loan payments can be realistically met, while helping the borrowers.

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