Qualifying for a mortgage can be a stressful experience, especially if you’re a first-time homebuyer. Many questions have to be answered about income, debts, and other potentially sensitive subjects. While all the questions may seem invasive, there’s no other way for a lender to get the information they need to determine whether you’re a good candidate for a loan. It helps to keep in mind that mortgage lenders have to follow certain lending guidelines that may not make sense to you as a consumer. But these guidelines often help you in the long run.
Determining Household Income
Many couples assume that both incomes have to be included when applying for a mortgage on a home that’s being jointly purchased. However, that’s not the case. There are times when it makes sense to try to qualify using only one person’s income. Here are a few scenarios to consider.
One of you freelances. If one member of the household is a freelancer or does work for clients on a contract basis, it may make sense to exclude that person’s income from the equation. The main reason is that this income is hard to quantify to someone who’s looking for steady paychecks–someone like a mortgage loan officer, for instance. Mortgage lenders need to see regular, predictable income, and most freelancers aren’t able to meet that requirement.
One of you has been laid off. It could be that you started down the path of homeownership, and then one of you was suddenly laid off. This scenario could impact your ability to get a mortgage because one of you no longer has a steady income. In this case, trying to qualify using only the income from the employed spouse is a good choice.
One of you is between jobs. Maybe one of you decided to leave an unfulfilling job for a better situation that hasn’t yet materialized. Or perhaps you have a new job lined up, but it hasn’t started yet. If now is the time that you’ve determined is right to buy a new home, you may need to try qualifying for a mortgage using only the salary of your currently-employed spouse or partner.
One of you has a low credit score. Perhaps one of you made poor financial decisions before you were married, and as a consequence, your credit score took a plunge. This is another instance when applying for a mortgage using only one partner’s income and credit score may be the best option–as long as your debt load is manageable.
Understanding the Debt to Income Ratio
Mortgage lenders have many guidelines they must follow when determining whether to make a loan to a prospective homeowner or not. While some guidelines are federally mandated, others are imposed by the lending entity – the bank, credit union, or mortgage lending company. One of the most important guidelines to keep in mind – and one that many homeowners don’t fully understand – is the debt to income equation. Let’s take a closer look at this key element.
The purpose of the debt to income ratio is to give mortgage lenders the data they need to ensure that you can afford to make a mortgage payment along with your other monthly obligations. If you’re loaded down with credit card payments, student loans, alimony, or child support payments, you may have trouble qualifying for a mortgage. Or you may only be eligible for a small mortgage, which limits the size of home you can afford.
Determining Debt to Income Ratio
Your debt to income ratio shows a mortgage lender how much house you can afford after paying all your current financial obligations each month. Here’s how it works:
- Total up all your monthly payments. This includes credit cards, housing, cars, personal loans, student loans, and anything else you’re on the hook for each month.
- Divide the total of your monthly debt by your gross monthly income. The resulting dividend is your debt to income percentage.
Current guidelines for most mortgage lenders dictate that your debt to income must be 43% or lower to obtain a Qualified Mortgage (a specific category of mortgage that is consumer-friendly and easier to obtain for most people). There are other types of mortgages that have more flexible guidelines. Some larger lenders may be willing to take a risk and loan money based on a higher debt to income ratio, but those are the exceptions rather than the rule.
A Single Income Still has to Meet the Guidelines
All this information about debt to income ratios is useful because when a two-income couple wants to try qualifying for a mortgage using only one income, that income must still adhere to the lending guidelines. That means the single income must be used in the debt to income equation, and the result must come in at or below 43%. For some couples, this is no problem, but for others who are carrying a higher monthly debt load, this can be a challenge.
Do Your Homework Ahead of Time
Whether you decide to use one or both incomes to qualify for your new home mortgage is up to you. But doing a little work ahead of time may save you the embarrassment of being turned down by the lender. Take time to add up your monthly obligations and do the math. Knowing your debt to income percentage ahead of time will help you determine whether using only one income to qualify is an option for you.
Call Homestead Financial Mortgage with Questions
If you still have questions about whether you can qualify for a mortgage using only one income, give Homestead Financial Mortgage a call. Our experienced loan officers are happy to talk with you about your situation and help you decide on the best route to homeownership. We have four branch locations to serve you: Overland Park, KS; St. Louis, MO; Glen Carbon, IL; and Godfrey, IL. Stop in and visit or give us a call today.