Quick Facts video 3: How capacity (your ability to repay) impacts your ability qualify for a mortgage loan.
How likely are you to be able to pay back your mortgage? Steady employment is the best determinant of your ability to repay. W2 wage earners are viewed as most stable from an underwriting standpoint because their income is easily documented. Overtime, commission, and self employment income are considered less stable and are more difficult to document.
YES! W2’s and tax returns prove steady employment
Maybe Overtime, commission, self employment
NO way! stated income loans (no documentation)
In our current market, full income documentation in the form of W2s and/or tax returns are required whether you’re self-employed or a wage earner. Stated income programs, which don’t require proof of income, are a thing of the past.
What is DTI? Debt-To-Income ratio or DTI expressed as a percentage is the most important ratio to know when qualifying for a mortgage. You compute your DTI by dividing your total monthly obligations by your monthly before-tax income.
Debt-To-Income Ratio or DTI = Monthly obligations / Monthly pre-tax income
For example, if a borrower has a $250 auto payment, $150 in credit card payments, and a mortgage payment of $850 per month, then monthly obligations total $1,250. If your gross income is $4,000 a month then your debt to income ratio is 32%. A good rule of thumb is that you want a DTI no higher than 40%.
$250 + $150 + $850 = $1250 (monthly obligations) / $4,000 Monthly Income (pre-tax) = 32%
Recommended DTI is 40% or less.
Another factor that impacts your ability to repay is the amount of liquid assets you have. Lenders want to see that you have enough cash reserves to cover your mortgage in “case of a rainy day”. Acceptable assets for reserves include checking, savings, and retirement accounts, as well as any other liquid cash accounts.
Saving for a rainy day pays off!
Checking, Savings, and Retirement Accounts as well as any other liquid assets make you more likely to be able to repay your mortgage.
Thanks for viewing our quick facts Capacity video, I hope you found it helpful. If you have any questions please feel free to call us, our loan officers are friendly and ready to help!
Our loan officers are happy to answer any questions! So give us a call at 800-Homestead-8! (A text file of this video can be found on our website)