Tag Archives: lenders

How does Overtime Effect my Loan Potential?

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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.

Documenting Income

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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.

How Effective is Debt Ratios When Applying for a Loan?

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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.

Documenting Assets

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Lenders prefer to see that the home buyer has a habit of saving money or can potentially use their assets as future income. To document assets, the lender will most likely ask the home buyer to provide three of their most recent statements, a recent quarterly or annual statement. These documents will present the lender with information about the home buyer’s saving patterns. It will also help to establish whether or not the asset is visible. Lenders prefer to see that the potential home buyer saved their money for the purchase instead of it being borrowed. By borrowing, the lender has reason to suspect that others may have had prior interest of that property. This is called a lien, which is more clearly defined as a legal claim on a property making it collateral against monies or services owed to another person or entity.

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.

Calculating Debt Ratios

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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.