Proving Income When Refinancing Your Home
Some homeowners may find that they need to be able to prove their income when refinancing their home. The bank or lender approval process for a refinancing request may be a long time consuming process. This means that a few weeks or even monthmay pass between th eapplication and the final approval.
In the meantime, life can be a suprizing trip ride, borrowers may find a better job or lose their current job, seasonal income may increase or decrease, nonsalary sources of income may begin (getting a second job) or nonsalary sources of income may be finished. Income documentation for FHA loans are not expected to change at 2012, the same basic guidelines still rule for refinancing applications.
Read below how on ways you can prove your income before refinancing your mortgage.
Taxable Income is the Only Kind That Counts
As a general rule, only taxable income can be counted when qualifying for a mortgage, says Julie Miller, a sales manager for Prospect Mortgage Co. in Irvine, Calif. This requirement trips up not only self-employed people but also employees who deduct unreimbursed employee business expenses on IRS Form 2106. Examples include business mileage, parking, travel, meals and entertainment costs.
“If you earn $60,000 a year, but you wrote off $5,000 in expenses, meaning you had to spend $5,000 to make $60,000, then your taxable income is only $55,000,” Miller says.
Nonsalary sources of income, such as a second job or sideline business, are acceptable if the income is consistent and reported on the borrower’s tax return, says Peter Thompson, a senior loan officer at Prospect Mortgage Co. in Naperville, Ill. Social Security benefits, pension payouts, child support and the like can count, too, if the payments are regular.
Seasonal income typically must be annualized to smooth out highs and lows and show a true picture, Thompson says. Examples include landscape and construction workers whose hours are dictated by the weather and retail sales clerks whose schedules vary by holiday shopping patterns.
Lenders Look Backward and Forward
Lenders use a two-year look-back period to evaluate a borrower’s income for a refinance or purchase mortgage. But that doesn’t necessarily mean the borrower must show two years’ worth of employment in the same job with the same employer, Thompson says. Instead, any gap in employment needs to be explained, and current income must be consistent and reliable.
“You don’t have to be at the job for two years,” he says, “but you have to show that what you’re working at now is likely to continue and that the income is realistic.”
Debt-to-Income Ratios are Conservative
Lenders use a debt-to-income ratio, or DTI, to figure out whether the borrower can afford the mortgage payment, even if it’s for a refinance with a lower payment. Years ago, borrowers could qualify with a DTI as high as 60% or even 65%. Nowadays, Miller says, most loans require a DTI of no more than 45%. FHA loans, insured by the Federal Housing Administration, are a bit more flexible.
“The automated underwriting systems typically want 45%Proving income to refinance your mortgage or below,” Miller says. “(With) FHA, you can still go to 50 fairly easily.” Read more on proving income..
Banks and lenders are much more careful when they come to approve a new mortgage for a borrower. The conservative guidelines are those you will meet when they look at your application. The low DTI ratio for home loans, is a way the lender secure themself from giving loans to borrowers who may later be in financial dificulties.
So you need to focus on two main aspects when coming to refinance your mortgage. To be able to verify your income before refinnacing, and to try and raise your FICO score, to get better terms by the lender. Improving to a better FICO score means you will get lower rates, and save thousands inlower mortgage payments.
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