Income Requirements for Home Loans
Besides a credit score a home buyer's income plays a large factor in his buying power with regard to real estate transactions. There are requirements for income that must be met with any lender and any type of loan. While this can vary from one type of loan to another, based on underwriting guidelines, it's important to know these requirements prior to shopping for a home or a home loan.
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Types
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Income must always be steady and able to be proven. Typical sources to verify income are: paycheck stubs, bank statements, W-2 forms or 1040 forms for self-employed home buyers.
Time Frame
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Regardless of employment sources, home buyers must show at least 2 years of stability by proving continual employment. While this does not stipulate staying with the same employer, it is most advantageous if a home buyer stays in the same type of career for 2 years with little income fluctuations.
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Ratios
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The income ratio that a lender will approve for a mortgage is typically no more than 36 percent of a home buyer's gross (before tax) income each year for a monthly payment. This ratio allows the home buyer to have other trade lines of credit and allow for expenses while being able to make a comfortable mortgage payment that fits in his budget.
Misconceptions
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Many home buyers believe that once they provide documentation to a loan officer to qualify to obtain pre-approval for a loan, that is all they are required to do. This is not the case. Prior to closing on a home, the loan officer will be required to collect the same documentation again, reflecting the most recent income and verified bank statements to obtain final approval.
Benefits
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Some home owners question the income requirements and ratios for approval of a home loan. However, the restrictions and guidelines are put in place to protect consumers by ensuring that they don't get overextended based on their mortgage payment.
Expert Insight
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When shopping for a home loan, interview at least three different lenders and obtain at least three different options for financing a home. Select the financing that best meets your needs and budget. Living beneath your means can allow you to pay off a mortgage faster and allow for investments in other venues.
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