If someone is going to loan you money, these are just a few questions you need to be able to answer before the lender hands over the check.
• How much money do you make? Are you self-employed? How are you paid?
If you are self-employed or commissioned paid, you will have to have been paid as such for two years or more. You will document your income with the last two years of taxes. If you have written off most of your income, then it will be hard to qualify to buy as much house as you wish to purchase. For example, if you have written off your income and left yourself with $15,000 income for the year, then the lender will only be able to qualify you using the income you have left available on the bottom line. Your income will not be counted prior to the write offs.
If you are paid with a paycheck, your income is documented with paystubs and W2s. If you do not own your business, it is easier to figure your income with the year to date on your pay stub. As a W2’d employee, you will still need to also document your last two years of income with your taxes and W2s.
• Of your income, how much do you already owe to someone else? What is your debt to income? DTI: What do you make before taxes come out in one month? Then you look at what your monthly minimum payment on each bill is that you owe and figure out what is left after your monthly minimum payments have been made on car loans, credit cards and other bills. The maximum debt to income allowed is 45 percent, including the new house payment with taxes, insurance and mortgage insurance included and association fees if you have those as well. For example: If your gross income for the month is $2,000 and all of your debts, including a new house payment, are $800 then your debt to income is 800 divided by $2,000. You are at 40 percent of your debt to income. Debt divided by gross income equals debt to income. This number has to be less than 45 percent for any loan.
• What is your credit score? The lender is trying to figure out how likely it is you will pay back your mortgage loan. The score you are given is calculated by the amount of credit you have accumulated, how much you are currently using (credit cards maxed out or paid off every month) and if you pay your bills on time. From this information the lender gives you a credit score which ranges for most in the 400 – 800 range. The higher your score the better. If you have people check your credit a lot, this affects your credit score. If you are always opening new lines of credit (don’t open that box store card for 10 percent off) your credit score is being impacted. More information to follow in the coming months as you prepare to buy your home.
Information provided by Lori Slings, Valley Bank, 160 Adventureland Drive, Suite H, Altoona, (515) 967-4700, firstname.lastname@example.org.