The Application Preparation Blog Series: Income & Employment
The second piece of “the mortgage puzzle” is your income and employment. When going through an application, loan officers want to see that you have a steady source of income, which will usually be in the form of employment. The next question will be how your income is determined, whether you’re being paid hourly, a salary, commissions, self-employed, or have guaranteed monthly incomes from social security, or pensions/retirement. Depending on which type of income you have, you might be asked for tax returns, proof of employment, or other specifics to provide more information. They will also want to know the name of your employer, what your position is, how long you have had that specific job and how long you have worked in that industry, so make sure you are prepared with this information and any dates that may be necessary.
The main factor with your income is consistency. Your Loan Officer wants to be sure you have a steady flow of income to evidence you can be reliable making your mortgage payments on time. For example, if you are working commissions, they will want to see a history to support consistent month-to-month income.
One thing first-time home buyers always want to know as they begin the application process is how much they qualify for or how much home they can afford. To figure this out, your Loan Officer will calculate your debt-to-income expense ratio, or DTI, using the income information you provided. This number determines how much you can afford to pay each month by dividing your monthly debt by your gross monthly income. This will be the percentage of your money that can go towards your debt and monthly mortgage payment. So from here it’s up to you to decide how much you are comfortable paying each month for a home while keeping your DTI in mind and considering your usual spending habits on things like food and entertainment.
Once you settle on a number you’re comfortable with, your Loan Officer will work the numbers backwards to draw up a plan from the monthly payment to what the price of your home might look like so you can go shopping for homes in that price range. Do not get discouraged if you feel you need to adjust your comfort number or even the area you want to live considering home prices you find. Adapting to the market is often a part of the process and it may take some time to find the right home, but your Loan Officer will always be there to guide you through any adjustments you make.
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