The Importance of Qualified Income When Getting Pre-Approved

This guide covers the importance of qualified income when getting pre-approved for a mortgage. Several factors are evaluated in the mortgage qualification process, and the importance of qualified income is due to debt-to-income calculations. Qualified income, credit scores, prior credit history, assets, debts, and liabilities are all important factors in the mortgage process. The lender’s underwriter takes all of the above into consideration. Dustin Dumestre, an associate contributing editor at GCA Forums, adds the following concerning qualified income:

The lender’s underwriter will closely scrutinize and evaluate every factor before granting loan approval. However, the most important factor is income.

A mortgage applicant can have the best credit scores on this planet and all the assets in the world, but without qualified income, there will be no mortgage approval. Borrowers can have bad credit and no assets and get a mortgage loan approval. However, with little or no income, the likelihood of getting a mortgage loan approval will be low. Our viewers can now understand the importance of income for mortgage qualification. This article will discuss the importance of qualified income when getting qualified and pre-approved for a mortgage.

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What is Qualified Income?

Before the real estate and credit meltdown 2008, homebuyers could qualify for a mortgage loan even if they did not declare a lot of qualified income. The mortgage industry had mortgage loan products like no documentation mortgage loans or stated income loans, in which applicants state their income, and the mortgage lender does not verify it. However, after the mortgage crisis and banking collapse of 2008, those products have evaporated overnight. New mortgage laws, regulations, and guidelines such as QM, SAFE ACT, and high cost were implemented. Qualified income in the mortgage qualification process is the most important factor in getting a mortgage loan approval.

How Do Lenders Qualify Borrowers?

Credit, assets, debts, and liabilities are important in the mortgage qualification process. A home buyer can qualify for a mortgage loan with prior bad credit if they have the qualfied income. Home Buyers can qualify for FHA Loans with credit scores as low as 500 FICO. Home Buyers can qualify for FHA loans with a 3.5% down payment requirement with credit scores. Dale Elenteny, a senior loan officer and associate contributing editor for GCA Forums Mortgage Group explains qualified income as follows:

Borrowers must provide proof of qualified income by two years of tax returns and two years of W2’s. Cash or income not sourced cannot be used as qualified income.

Mortgage Loan Applicants can have prior open collections and charge-offs and still qualify for a residential mortgage loan without needing to pay off the old collection accounts and charge-offs. To qualify for FHA Loans, mortgage applicants need to have documented and qualified income.

Home Loan With Judgment

Judgment is one of the worst negative credit items anyone can have on the credit report. With an unsatisfied civil judgment, I can get borrowers approved for a mortgage loan. But again, they need to have proof of a written payment agreement and have been paying for at least three months. There are ways to qualify for home loans with outstanding judgments.

Judgments can be paid off at closing. Borrowers can qualify for mortgage loans with outstanding judgments if they have a written payment agreement. The judgment debtor needs to have a written payment agreement with the judgment creditor and be on a payment plan with at least three months of timely payments. Verification is required by providing three months of canceled checks and bank statements.

Importance of Qualified Income and Overtime Income

Various types of income can be used in the mortgage qualification process. Of course, the most common income is wage income, which is either salaried or hourly. Overtime income can be used as long as the borrower has had consistent overtime income over the past two years. Unfortunately, overtime income under two years cannot be used in the mortgage qualification process.

Types of Income That Can Be Used For Mortgage Qualification

Social security income can be used and can be grossed up by 15%. For example, a recipient of social security income with a net monthly paycheck of $1,000 can be grossed up by 15%. That $1,000 social security income grossed up by 15% reflects a monthly income of $1,150.00 in the mortgage qualification process. Pension income can also be used for mortgage qualification. Pension income can also be grossed up if not taxed like social security income. Rental income is another common income that can be used as long as you have declared the rental income on income taxes for the past two years. For borrowers who own real estate, depreciation can be added as additional income.

Frequently Asked Questions on The Importance of Qualified Income For Mortgage Pre-Approval

Dealing with pre-approval is not usually a walk in the park, and important aspects, such as qualified income, might be missed. The term might raise further questions, and if you are looking for answers to your concerns, you’ve landed at the right place. This article serves as an answer to all your queries aimed at the importance of qualified income when getting pre-approved.

What is Qualified Income?

A straightforward term, qualified income refers to salaries, bonuses, wages, including commissions, and any other permanent earning that can be substantiated and, when documented, qualifies you for a mortgage. It can be described as the earnings that a borrower must pay as a complete loan.

Why Should One Be Concerned With Qualified Income For Pre-Approval?

Having a basic understanding of qualified income tackles the next question efficiently. To state the obvious, the qualifications loan can only be approved if the loan is paid back. Any sensible lender would certainly think of the steady income. The more the income, the greater the chances of getting loan approval for increased loan amounts.

How Do Lenders Verify Taxes?

Once again, opting for a simple answer, a qualified income may be verified through pay stubs as well as documentation that meshes well with the following criteria:

• Bank Statements: They help in verifying additional sources of income

• Pay Stubs: Recent pay stubs help to validate current pay and earnings

• W-2 Forms: Excluding the pension stating the yearly earned income

• Tax Returns: Lastly, consistency for the past two years must be ensured.

What income Sources are classified as qualified income?

Another potential turn-off while dealing with pre-qualification could be dealing with self-employed or freelance gigs. But it is worth mentioning that qualified income can include which of the two groups does indeed tackle self-employment tax returns:

• Sales Tax: Qualified Income can be deducted from freelancers’ and taxpayers’ business owners’ income.

• Wages: If employed frequently, fixed payments can be earned.

• Bonus: This can be a double-edged sword, as some people consider it a valid source, but some might be unwilling to take that risk.

• Rental Income: Conversely, qualified income from renting a property is always a reliable option.

• Pension: Regular payments received from social security or retirement are also a viable option.

Can Unstable Income Affect My Pre-Approval?

It would help if you were more spot-on. A consistent or stable income can adversely affect your pre-approval. If you can justify this instability, lenders prefer a steady stream of income earners since such borrowers would have fewer chances of defaulting.

What Can I Do To Improve My Non-Qualified Income To Apply For Pre-Approval?

You can enhance your qualified income by:

Maintaining Employment: Try to keep full-time sources of income; if not, try less than full-time sources.

Documentation: Ensure that all your forms of income have support documentation and are targetable.

Seek Other Maximum Income Sources: Look for additional, part-time jobs or work additional hours.

How Does Debt To Income Ratio Affect Qualified Income?

Debt-to-income ratio is a highly relevant metric that lenders carefully consider when you apply for pre-approval. According to lenders, the lower the DTI ratio, the better. There is a chance of getting pre-approved for a loan if the DTI ratio is below 43 percent, which also underpins the importance of your qualified income.

What If I Don’t Have Regular Employment Income?

If you don’t have a steady employment source, then you qualify using:

Benefit Payments: Investments such as child support and alimony payments can be considered instead of benefit payments.

CD Interest: Earn less stock or bonds than using CDs.

Earnings From Employment: Sometimes, these benefits may not be qualifying.

To become successful homeowners, potential buyers must grasp the meaning of qualifying income in pre-approval. It’s not rocket science to submit a perfect application for a mortgage: Make your income ‘conforming,’ well-structured, and suitable to lenders’ requirements.