Do loan officers look at gross or net income?
Mortgage lenders often look at gross monthly income to determine how much mortgage you can afford, but it's also important to consider your net income, as well.
Gross income is the sum of all your wages, salaries, interest payments and other earnings before deductions such as taxes. While your net income accounts for your taxes and other deductions, your gross income does not. Lenders look at your gross income when determining how much of a monthly payment you can afford.
Lenders Look at Your Gross Revenue
They also don't use your adjusted gross income on your tax return. Instead, they look at your net business income — the amount you bring in after you subtract relevant business expenses.
Mortgage companies verify employment during the application process by contacting employers and by reviewing relevant documents, such as pay stubs and tax returns. You can smooth the employment verification process by speaking with your HR department ahead of time to let them know to expect a call from your lender.
Most lenders ask for your “total amount of income”, which is your Gross, however, keep in mind they also look closely at the amount of debt to income. Both. Lenders do a front end ratio and a back end ratio to determine your ability to repay the loan.
If you are a salaried or hourly wage employee, your pay stubs and/or W-2s will show this. If you are self-employed, expect to share your tax returns as evidence of income earned. In both cases, lenders will typically request to see your records from the last two years.
What do lenders generally require? Lenders usually require the PITI (principle, interest, taxes, and insurance), or your housing expenses, to be less than or equal to 25% to 28% of monthly gross income. Lenders call this the “front-end” ratio.
Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 31%.
The IRS also requires you to enter your prior year's AGI when you e-file if you've prepared your own taxes. You'll find your AGI on last year's IRS Form 1040, line 8B. AGI is the figure lenders are looking for when they ask for your income on a mortgage application.
While there are several programs out there that allow lenders to use your gross income to qualify you for a mortgage, generally speaking, most lenders will use your net income (or income after business expenses are deducted).
How does underwriter verify income?
Income, asset and employment verification
This is when the lender's underwriter checks your credit and financial situation to confirm you're capable of repaying the loan and also verifies your employment. You'll need to submit documents such as W-2s, pay stubs and bank statements for verification.
| Lender | Minimum Annual Income Required | Loan Amounts |
|---|---|---|
| Universal Credit | No verification | $1,000–$50,000 |
| Best Egg | No verification | $2,000–$50,000 |
| Upstart | $12,000 | $1,000–$50,000 |
| Avant | 2.5x the amount borrowed | $2,000–$35,000 |
Loan officers use bank statements to assess a borrower's financial health and credibility when considering a loan application.
Your gross income helps determine your AGI and taxes, while your net income can help you create your monthly budget. Both are important parts of your finances, so it's important to know what your gross income and net income are.
Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
Depending on your credit score, you may be qualified at a higher ratio, but generally, housing expenses shouldn't exceed 28% of your monthly income.
What income is required for a 200k mortgage? To be approved for a $200,000 mortgage with a minimum down payment of 3.5 percent, you will need an approximate income of $62,000 annually. (This is an estimated example.)
$300,826. With a $1,800 payment and $0 down you can afford a maximum house price of $300,826 with these loan terms.
If I Make $65,000 A Year What Mortgage Can I Afford? You can afford a home up to $265,000 with a mortgage of $260,200. This assumes a 3.5% down FHA loan at 7%, a base loan amount of $255,725 plus the FHA upfront mortgage insurance premium of 1.75%, low debts, good credit, and a total debt-to-income ratio of 50%.
Mortgage lenders often look at gross monthly income to determine how much mortgage you can afford, but it's also important to consider your net income, as well.
What is the gross income when applying for a loan?
An individual's gross income is used by lenders or landlords to determine whether that person is a worthy borrower or renter. When filing federal and state income taxes, gross income is the starting point before subtracting deductions to determine the amount of tax owed.
If I Make $70,000 A Year What Mortgage Can I Afford? You can afford a home price up to $285,000 with a mortgage of $279,838. This assumes a 3.5% down FHA loan at 7%, a base loan amount of $275,025 plus the FHA upfront mortgage insurance premium of 1.75%, low debts, good credit, and a total debt-to-income ratio of 50%.
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
| Loan Type | Down Payment % | Income Needed |
|---|---|---|
| Conventional | 20% | $77,000 |
| FHA | 3.5% | $67,000 |
| VA | 0% | $69,000 |
| USDA | 0% | $78,000 |
An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range. Rocket Mortgage® requires a minimum credit score of 580 for FHA loans.
