What are lenders looking at when they are verifying income?
First, you need to give them your past 30 days paystubs and your past 2 years tax information. The lender will then figure out your yearly income by taking the 2 years and dividing it into months.
When a lender does that, they are making sure that you can make a payment every month. The way they do this is by figuring out what your "debt to income"(DTI) ratio is.
Debt to income ratio: How much monthly debt you have versus how much you make in a given month.
*** Let's say you make $2,000/month. You have monthly debts of $1,000. Your debt to income ratio is 50% because your debt takes away from half of your income. ***
There is a top DTI and a bottom DTI. Your top DTI represents how much your mortgage payment takes away from your income. Your bottom DTI represents how much your total monthly debts take away from your income.
***Let's say you make $2,000. Your mortgage payment is $800. Your total monthly debts are $1,000. Your top DTI is 40% and your bottom is 50%. *******
What is a good DTI?
- There are different guidelines for DTI.
Fannie Mae - 28/36 - means your mortgage payment can take up 28% of your income and your other monthly debts cannot exceed 36% of your income.
Freddie Mac - 33/38 - means your mortgage payment can take up 33% of your income and your other monthly debts cannot exceed 38% of your income.
FHA - 31/43 - meand your mortgage payment can take up only 31% of your income and your other monthly debts cannot exceed 43% of your income.
