Your lenders will be able to more accurately describe what is needed for their particular programs – however, you do need to be made aware of some important things as far in advance as possible. It used to be that if your credit score was above 720, you didn’t need to be concerned about having to document your income. Unfortunately, lenders are still cautious after the industry collapsed in 2008, so now you may have to prove how much money you make – of course, this refers to getting the highest “loan-to-value ratios.” The more money you have to put down, the lower the score needed – and the more lax the lender’s requirements become.
For the sake of discussion – If you are required to prove your income, there are a usually a few acceptable methods which may include:
• Your Last Two Years’ W-2’s or 1099’s and Your Past 30 Days of Pay Stubs;
• 6-12 months of Personal Bank Statements – 100% of the deposits are tallied to determine your average monthly income.
• 12 months of Business Bank Statements – If you are self-employed, this is sometimes acceptable. However, lenders will commonly count only 75% of the total amount of deposits made.
• Rental Income – You are allowed to count 75% of your annual rental income in addition to your other income. Lenders count on a mandatory vacancy rate of 25%, regardless of how many years your tenants have been there. Landlord, beware! – Lenders may require copies of lease agreements.
• Child Support and Alimony – You can claim 100% of child support and alimony income – as long as you can demonstrate you will continue to receive these payments for the next three years.
• Disability and Social Security – Government issued checks are actually calculated at 125%. For example: If you get $10,000 a year in Social Security, lenders will count it as $12,500.
There are two types of standard asset requirements that are an inherent part of an average mortgage loan:
• The first type requires you to show that you have had enough funds sitting in a bank account for at least two months to cover your closing costs (e.g., down payment, lender fees, taxes, title insurance, interest, etc.). For example: If your down payment is $10,000 and your closing costs are about $6,000, you’d need to source a total of $16,000 from one or more of your accounts (that has had an average balance of at least this amount – or higher – for the past two months).
• The second asset requirement is what is known as reserves. Reserves are the amount of money necessary to continue paying the proposed mortgage payment (including principal, interest, taxes and insurance) for a specific amount of time, should you become unemployed. The amount of time required by lenders ranges from two to twelve months and must also be sourced from one or more of your accounts for the past two months. For example: If your total proposed mortgage payment is $2,000 and the lender requires reserves of six months, you would have to show that you’ve had at least $12,000 or higher as an account balance for the past two months – this is in addition to the $16,000 you would need to show for the closing costs mentioned above.
One of the reason lenders require both types of assets to be source from accounts with an average balance equal to or greater than the required amount is to prevent the laundering of money obtained from illegal sources (e.g., drugs, weapon sales, theft, etc.) from being washed into real estate – which then makes it difficult to trace.