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I agree when I "qualified" for my mortgage their standards were WAY TOO LENIENT, and that was middle of 2008, after the stuff started hitting the fan.
Personally I think you should have to document all of your bills, and expected bills, such as cell phone contracts, car insurance, electricity, heat, water, etc. then have a cushion leftover at the end for unexpected costs. Isn't this what a mortgage broker is for? To protect the banks interests? Or is his job only to qualify the person anyway possible?
On my loan docs I had only had my student loan payment even though I was moving into a house from an apartment. Had I bought the house they qualified me for I would've been hurting with all the other bills and expected bills such as house maintenance.
My husband is the only person in out family of four who is working. On every single one of his pay checks his gross pay fluctuates depending on how much O.T. he got, therefore his net pay is going to fluctuate. So knowing that people can not really live off of their gross pay it makes no sense to me that they continue to go by gross pay. We can't pay our rent with gross pay, we can't buy or groceries with gross pay...so then lenders and other companies shouldn't go by gross pay seeing how we can't pay anything with that. There is a non profit organization, and they deal with low income houses on a rent to own basis. They go by gross income and were right under the limit BUT with them counting my husbands overtime it put us $2,000 over the limit. Again I will never understand how they can count overtime because he doesn't always get it...and we don't pay our bills with the gross income. So it is just one more way for companies to screw people.
My husband is the only person in out family of four who is working. On every single one of his pay checks his gross pay fluctuates depending on how much O.T. he got, therefore his net pay is going to fluctuate. So knowing that people can not really live off of their gross pay it makes no sense to me that they continue to go by gross pay. We can't pay our rent with gross pay, we can't buy or groceries with gross pay...so then lenders and other companies shouldn't go by gross pay seeing how we can't pay anything with that. There is a non profit organization, and they deal with low income houses on a rent to own basis. They go by gross income and were right under the limit BUT with them counting my husbands overtime it put us $2,000 over the limit. Again I will never understand how they can count overtime because he doesn't always get it...and we don't pay our bills with the gross income. So it is just one more way for companies to screw people.
Here's the thing: the Housing Ratio (house payment cost divided by gross monthly income) is one qualifier. The other is the Total Debt ratio, all monthly debts divided by monthly income.
These are FNMA guidelines. These are set by Politicians, most of whom have Legal backgrounds, not Financial. (Yes, I'm broadstroking, yes there are other agencies besides FNMA)
Why use gross income? It's a constant. Everyone has different income tax situations. Many people are exempt. Some people pay a State income tax AND Federal. Some people pay Federal and State, but have no Sales Tax in their state.
Basically, 31% was the number they came up with. The consensus was, and remains, that a borrowers total house payment, in most cases, and in the absence of Compensating Factors, should not exceed 31% of their Gross Monthly Income. If this is a question mark to you, welcome to the club, but you are literally going to have thousands and thousands of them about the mortgage process.
Regarding overtime, it is simple: Must have received it for 2 years, must be documented by employer that it will continue, 24 month average = the component added to monthly income. And YES, for Low Income Housing, Grant and USDA programs, the income is calculated so as to MINIMIZE IT regarding mortgage qualification, and then done differently in an attempt to MAXIMIZE IT for the Assistance Programs. (Note I said simple, not that it makes sense or is fair)
When qualifying homeowners with late payments for a loan modification. It is very easy to estimate the results of a modification, because the final modified payment will be based on how much income is reported to the lender. The first check is an affordability test done in two parts using the 31% of the income formula.
First determining the new loan balance with arrears, including taxes and insurance. By restructuring the loan at 2% seeing the new minimum payment. Second reviewing the total income of the borrower(s) on the loan, factoring the gross by 31% which need to be more than the previous new minimum payment. Again the final payment (+ new interest rate) is based how much income that gets reported.
When there is to much gross income, that can result is a higher modified payment. The best option is a Net to Net Modification, using the net income and deducting reasonable household expenses.
Why use gross income? It's a constant. Everyone has different income tax situations. Many people are exempt. Some people pay a State income tax AND Federal. Some people pay Federal and State, but have no Sales Tax in their state.
Also after a mortgage starts to get paid, the tax situation changes. Especially for the first few years. When your paying 90%+ tax deductible interest payments, what tax you paid when you were a renter is gonna be quite different. Using gross income removes this.
Gross is NOT a constant...you couldn't be more wrong there. My husband makes over time therefore so does his gross...it either goes up or it goes down to his normal pay...but it never stays the same.
Modification Specialist...whatever it was you just said...I didn't understand any of it. And from what I gathered of what you were saying which was referring to buying a house...really has nothing to do with what I was trying to do. The house I wanted you had to rent first and then maybe buy later down the road. It is for low income families....but due to the overtime my husband gets that puts us right in between low and middle even though we still struggle, that is how they see us...as middle class.
Gross is NOT a constant...you couldn't be more wrong there. My husband makes over time therefore so does his gross...it either goes up or it goes down to his normal pay...but it never stays the same.
This is confusing. Gross is a constant if your husband has a steady rate of base pay every month or for an entire year. Does your husband work on an hourly basis or is he on a rate based salary structure that is based on projects?? Is he a seasonal employee who only works X number of months then 0 other times (ie like ice road truckers)?? He has to have a basis for earning an income. If someone asks him, what does he earn, does he say, "i make X per hour/month/year"? My husband gets a ton of overtime but his employment contract states his salary is $ XX per year. That means, banks wont care he made $10K extra last month on OT, they want to know what the annual salary is per his employment agreement. When a bank asks about gross salary, they want to know what the terms of compensation are, whether its a flat fee, an hourly rate, or an annual rate of pay. Even as a salesperson in high school, my gross salary was only "$3.35/hr " plus whatever i made in commissions which is how my paycheck was around $1200/bi weekly when in reality, without commissions, it was a guaranteed $3.35/hr. The bank will use that $3.35/hr.
Another example with fast food workers claiming a gross salary: if they make $8/hr and are obligated to work at least 30 hours every week- their gross income would be $240/week ($960/month or $11,520/yr) plus whatever they earn with overtime (if they qualify for OT). Banks care about the guaranteed minimum amount. Anything earned as overtime wouldnt make a big difference because obviously some months the overtime will be great and some months, maybe not so great...banks dont want to deal with "what ifs". They want to know what income is coming in for certain every month in your bank account just for showing up to work.
Last edited by LegalDiva; 09-04-2014 at 09:02 PM..
To answer your question, the loan officer doesn't want to have to run a tax scenario on every single applicant. Nor could they. Youd have to have a handful of tax accountants on staff, tax accountants that have a large going rate. Plus tax situations change from year to year so just because you had an effective rate of 15% this year doesn't mean that will be your effective rate next year. Plus they account for this in their approval, they just don't tell you. Instead of taking 31% of gross they would just use 36% of your net. (Assuming your effective rate is 15%)
I think gross pay is used because
The actual numbers look bigger than actual pay
Most people don't even know or check how much in taxes was paid
And if you see a smaller number it may be a negative deciding factor when buying a home
Even though if you make 50k a year you would say to yourself I can easily afford that 180k mortgage. Because without much though we are really thinking it's only 3sx our salary... While reality that a person making 50k can't afford that 180k home, because they would be house poor and won't even save 500 a month.
Is not the same joe buying a 150k house with 50k a year
Vs
Moe buying a 600k house with a 200k salary....
While is the same ratio, life is no much expensive to the person making 200k other than if they decide it. I personally spend like Someone making 60k to 90k a year. It haven't go up just because I make more, even though I want an expensive car and a super nice house I just wait until the right time comes.
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