You just got that phone call from your loan officer a few moments ago and you're heartsick. You didn't qualify for the house you really wanted.
Yes, you knew it was a bit of a reach but sometimes emotions can get pretty strong when you find your dream home. The loan officer said your debt ratios were just a little too high. Perhaps you should find a smaller home, he said.
But you know something: Unless your income is cut and dried, you know, the monthly salary thing, it's possible that your loan officer made a mistake when calculating your income.
First, let's all understand that when calculating debt ratios lenders use your "gross" monthly income. Gross income is income before any deductions like taxes or insurance are taken. If you're wanting to get pre-qualified and the loan officer asks you how much you make, make sure you're giving them the correct amount. If you declare your after-tax income you'll be hurting your qualifying efforts. Yes, most loan officers know this, but sometimes they'll forget to ask.
Second, when calculating your total debt ratio, usually only installment, revolving and support payments are used, along with your new home's principal, interest, tax and insurance amounts (PITI). Another common mistake is including such things as utility bills or groceries in the total debt amount, so don't include those items.
A common income distortion occurs when people get paid every other week instead of twice per month.
This is understandable. Sometimes when asked how much do you make every month it's easy to think "two paychecks" each month. And for those who get paid on the 15th and 30th of the month that's pretty much correct, but if you get paid every other week you may be harming yourself.
If you get paid that way, say every other Friday, you should take your gross paycheck and multiply it by 26 (every other week for the entire year) then divide by 12 to get your monthly figure. Again, your lender should ask this, but remember to bring it up if this is you.
Do you get paid by the hour? Do you also get overtime? Lenders will calculate your monthly income by taking your weekly forty-hour gross pay, multiply that amount by 52 then divide by 12. Lots of folks who get paid by the hour also get overtime, but most guidelines for using overtime require that you have at least a two year history of overtime and also that your employer indicates that overtime is possible or likely. If you get overtime, remember to include that money when disclosing your income.
Do you get any non-taxable income every month? Many disability payments, housing allowances and other non-taxed income may be "grossed up" when calculating monthly income. If you receive $500 per month in disability benefits for example, for qualification purposes many lenders will multiply that amount by another 25% or so -- meaning for qualification purposes you have $625. Because debt ratios are calculated using before tax income, any non-taxable income must be adjusted upward to arrive at a consistent amount.
Remember, it's your money, you've earned it. Make sure your lender is looking in absolutely every nook and cranny to get you correctly qualified.