Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like Banks.com, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.
Updated December 18, 2023
When you apply for a home loan, the lender will consider several factors before approving or denying your application. Your credit scores from the major credit bureaus – Experian, TransUnion and Equifax – can mean the difference between getting a loan with competitive terms, being offered a steep interest rate or not being able to get a mortgage. The amount you earn is equally important in the eyes of lenders as both provide insight into how you manage debt and if you’re able to afford the mortgage payments.
Loading. Loading.In the mortgage world, there are two ratios to keep in mind when considering how much home you can afford:
*Quick note: If you’re self-employed, the lender will use your net income (after business deductions). To reach the monthly income figure, they will divide the total you’ve earned, as reflected in your two most recent tax returns, by 24. To illustrate, if the sum of your net income is $144,000 for the past 24 months, the lender will use $6,000 as your monthly income figure.
Historically, the rule of thumb was that your front and back-end DTI ratios shouldn’t be more than 28 percent and 36 percent, respectively.
But nowadays, there’s generally a lot of flexibility with those figures. In fact, several lenders permit DTI ratios of up to 43 percent, and some go even higher. It depends on your credit score, assets and down payment amount.
Loading. Loading.It’s not enough to input your income amount on the application and expect the lender to take your word. Instead, prepare to provide copies of your most recent pay stubs and W-2 form. Ideally, you want to have two years of consistent income, ideally in the same field, to be a good candidate for a mortgage. You can also provide documentation in the form of an income letter if these documents are unavailable because you recently took a new job. But if there are gaps in your employment, you could have trouble getting approved for a mortgage unless you have a valid reason. Self-employed applicants have slightly different documentation requirements. In most instances, tax returns from the two most recent years that reflect a consistent or increasing income will suffice. Some lenders will also request a profit-and-loss statement and possibly the last two to three months of bank statements. Beyond pay stubs, W-2 forms and tax returns, the lender will take the verification a bit further by connecting with the IRS to confirm the amounts listed on your documents. This is done through IRS Form 4056-T, a document you’ll need to sign and authorize the lender to send directly to the IRS to have your tax records released.
Get a quote today on the website, and it’s fast and free. A member of the Angel Oak Mortgage Solutions team will contact you to discuss traditional and non-qualified home loan options.
