When looking to purchase a home, mortgage loans can be obtained based on your income and debts. When applying for the loan, the lender will assess these factors to determine how much you can afford each month in mortgage payments and what size down payment is necessary.
When applying for a loan, lenders will consider your gross income–the amount earned before taxes and deductions are taken–as an indicator of financial health. This number provides them with a reliable and steady figure to work from when assessing your circumstances.
Your lender will take into account how much you spend on housing costs, such as your mortgage payment and property taxes, plus any homeowner association fees if applicable. It may also be important to factor in your debt-to-income ratio (DTI), which is the portion of your monthly income dedicated to paying off housing expenses, student loans and other bills.
If your debt-to-income ratio is high, your lender may require that you make additional monthly mortgage payments to settle some of your other obligations. This could include credit card balances or car loan payments.
Some lenders may require you to set aside a certain percentage of your income for a down payment, which is money paid upfront for the home. Doing this demonstrates your seriousness about purchasing a property and helps them decide if you qualify for a mortgage.
A down payment is an expensive and daunting investment, but it also demonstrates your capacity for saving and having a reliable job history.
Prequalifying and comparing mortgage rates from different lenders is an essential step that you should take. You can do this online using NerdWallet’s mortgage calculators or by reaching out to our loan experts for guidance.
When applying for a mortgage, the lender will assess your income using W-2 forms and tax returns. You may also provide special-case income, such as overtime or commissions, if applicable.
Your lender typically requires you to have two years of stable, consistent income if you wish to qualify for a mortgage. Other sources of income, such as alimony or child support payments, must also be verified by the lender.
The lender will review your other debts, such as your mortgage payment and any recurring monthly obligations you have. This could include credit cards, auto loans, student loans, medical expenses or any other owed amounts.
For optimal mortgage eligibility, your total monthly debts should not exceed 43 percent of your gross income. This ratio is used by lenders to assess whether or not you make a good candidate for financing.
Mortgages are the single biggest investment most people will make during their lives, and it’s also the costliest way to borrow money.