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.

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.