Every home owner or home buyer wants to have the lowest interest rate and payment- right? Here are the four categories for qualifying for the lowest mortgage interest rate.
They are - Income, Credit, Equity and Assets. The acronym is I.C.E.A for short.
Lets concentrate at the top of the list with the Income category. Every good Mortgage Loan Officer has to scrutinize the borrowers income because this is the biggest variable on the loan application.
They will need to see one current month of paystubs and two years of W2's from your employer. Federal 1040 tax returns are usually only needed if you do a lot of write-offs or are self-employed.
Income, or lack of income, is the biggest mortgage deal killer of our time. Why?
Because most home buyers want to spend every dollar they make buying the most expensive house they can afford. They want to live in the best neighborhood available to them and their family - right? Yes - me too!
These families have high debt to income (DTI) ratios. For example - if a family has gross income of $6000 per month and their monthly bills on the credit report are $3000 per month, their DTI is 50 or 50%. This DTI ratio is the max for Conventional loans, also known as Fannie Mae or Freddie Mac loans.
This Max DTI of 50% can be exceeded with FHA or VA loans. But the higher the DTI, the lender will want some compensating factors like cash in the bank, reserves in the form of stocks, bonds, CD's, or 401k to get the loan approved.
A DTI of 40 or lower will help you qualify for the best interest rate.
We should define gross income. It is income before taxes. Net pay is income after taxes, also know as take home pay.
We know that if I make $6k gross a month, I'll only see $4,200 (at most) deposited in my bank account, estimating a 30% tax rate. This would mean a $1800 tax (federal, state, etc.) per month and a $4200 net pay.
A good loan officer will comb over your paystub to see if there are deductions like - Alimony, Child support, loan repayments, IRS or other wage garnishments, etc. because the underwriter will find it!
Then the loan officer will add up all of your monthly debts that show on your credit report. These debts are mortgage payments or future mortgage payments (including property taxes and insurance), credit card minimums, car payments, student loan payments, etc.
Once all income and countable debts are considered - the loan decision can be made.
I would not try to calculate your DTI at home without a freshly pulled credit report and a loan officer by your side as you are bound to screw it up. So - let a veteran loan advisor take care of this.
If you are confused or don't want to deal with numbers then feel free to call or email me and I can assess your financial picture and see what you qualify for.
I'll address the Credit, Equity and Asset categories in the next Blog.
Best Regards,
Bryan Horn
NMLS 251502
Mortgage Loan Advisor
Western Capital Mortgage
858-805-5347
bryan@westerncapital.net
bryanhorn1@gmail.com
