With negative news about mortgages in the media these days, a person looking for a mortgage might wonder how they will qualify. The answer is that they must “show us the money.” It is another way of saying that qualification is all about the income that can be supported with documents.
Since 2008, over 60 new rules were introduced to the mortgage market, including the infamous stress test. Today, I will explain the essence of what it takes to qualify for a mortgage with the current rules.
Knowledge will give you power to prepare for future mortgage applications. Whether you are thinking of buying a home or if you are considering a refinance, the most important thing to know is that mortgage applications are about Income, Income and Income!
Well, that last statement is exaggerated – somewhat! Mortgage applications really depend upon:
- The property,
- Your income,
- Your down payment or equity, and
- Your credit report.
Every mortgage application must meet the requirements of these four categories. But what has changed is that in previous years, a large down payment or a lot of equity in your house could get you a mortgage with little proof of income. Today, if you don’t have fully provable income you CANNOT get a mortgage at lowest interest rates.
Because mortgages are about Income, Income and Income, the borrowers who are most impacted are those whose income is not changing or whose income is limited: Self Employed, those starting a career or a new career and those who are retired.
Tip: For those who are anticipating a life change that will impact the amount or the nature of their income, it is worth having their mortgage options reviewed before that change. This includes people who are about to retire and should consider getting a line of credit before they retire.
Calculating your income is not as easy as it sounds. There are some situations where you can increase your income on paper. An example is if you are on a disability pension (in some cases) or maybe when you are self employed and have expenses. The rules for taking into account rental income are especially complicated.
Tip: Avoid online qualification sites for a mortgage and work with a professional who will know how to calculate your mortgage-acceptable income for a mortgage application.
For a lender, income is not just about how much money you bring in, but it is also about how much money you send out. Certain expenses will lower your maximum mortgage amount. For example, if you have a $500/month payment on a car loan or a car lease, your maximum loan size will be $100 000 less!
Tip: If you can postpone buying a new car or if you can buy a less expensive care BEFORE applying for a mortgage, you will have more mortgage options.
Mortgage applications may have become tougher over the last 11 years. By being mindful when planning your mortgage, you will have greater success in getting most mortgage options.