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Qualifying Income You Might Not Know About

Lenders want to make sure borrowers can comfortably repay their loans. Doing so allows the lender to make even more home loans. Affordability is primarily determined by comparing monthly income with monthly debt. Income is relatively easy to document simply by reviewing recent paycheck stubs, W2 forms and/or tax returns. But for those who are seeking additional income support in order to buy and finance a home may not be aware there are other sources lenders can use.

Support Income

Either in the form of spousal support or child support, this type of income can be used to help qualify under certain guidelines. First, there needs to be a history of timely payment. This is accomplished by providing copies of bank statements showing the monthly deposits being made and when. It is also assumed spousal support will continue into the future barring the ex-spouse receiving the income has not married. Child support payments typically continue until the child turns 18. These conditions of who pays what and when as well as when and if the payments will cease are spelled out in the signed divorce decree.

Investment Income

Dividends and interest from investments may also be used to supplement qualifying income. The income must be shown to be consistent over the previous two years and the borrower’s name must appear on the statement. Any other names on the statement will cause the lender to divide up the income among all who appear on the investment account. Income is averaged over the previous 24 months in order to arrive at a qualifying amount. 

Disability Income

When someone is injured while on the job, they may be eligible to file for disability payments. This can be verified by reviewing a copy of the disability policy benefit statement. This income may also be used as long as the lender makes the determination the income will likely continue well into the future, for a minimum of three years. It can sometimes be the case that the disability is shorter term in nature, or the lender needs more information about the nature of the disability filing. However, it’s important to note that individual doctors may be reluctant to provide such personal details.

Social Security Income

This is fairly straightforward but social security income can also be used. In order for the lender to use social security income, all that is needed is a copy of the social security awards letter. A request for this letter is made directly to the Social Security Administration either by the borrower or the lender.

Bonus Income

Like other forms of income, bonus income can be counted as long as there is a regular history of having received it. Bonus income should be both consistent and at regular intervals. Bonus income is averaged and should be paid monthly or sometimes quarterly. An annual bonus most often won’t be used. It’s thought that a holiday bonus in December may not be readily available in say July. Verification of the terms of the bonus can be obtained directly from the employer.

Part Time/Seasonal Income

With a two year history of receiving part time income as well as seasonal work such as during the holidays or during the summer, this income can also be counted when adding up qualifying income. The part time income should also be relatively consistent. Seasonal income may be counted, depending upon the lender’s internal guidelines, again with evidence of receiving it for the most recent two years and paid out in a consistent manner.

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Using Income from Tips to Help Qualify

For many of those in the service industry, getting additional income from tips accounts for quite a bit of an employee’s take-home pay. In fact, it’s not unusual for someone working in a restaurant to get the majority of the income from tips as the employer pays a minimum wage. Tip income is a big deal. But when it comes to getting approved for a home loan, while tip income can be rather significant, borrowers need to be aware of how that tip income can be used to help qualify.

First, there needs to be a history of receiving it. Borrowers must be able to show receiving income over the previous two years. In addition, this income must also be consistent. Providing a two-year history helps lenders make the determination the income will continue into the future. But how the borrower treats the income is significant. Tips can come in the form of a few dollars left at the table or nightstand or included on the credit card slip. What the employee does next is critical.

Tip income must be logged. When an employer sends out W2 forms, the wages shown will typically be the minimum wage paid. Employers don’t keep track of an employee’s tips, it’s up to the borrower to track it. There can be a manual log kept that keeps track of how much tip income was received and when. In addition, the tip income deposits must be verified. 

This is accomplished by reviewing past bank statements. For instance, an employee can collect tips on a daily basis but deposit the tip income weekly. These deposits must show up on these past bank statements.

Further, the tip income must be reported to the IRS for the past two years. The income reported is the income lenders will use when qualifying, regardless of how much tip income has actually been received. For some, all the tip income might not make it to any bank account at all but instead spent on everyday expenses. Here again, while the tip income is in fact received, there is no third party record of having received it. Unless the income is deposited on a regular, consistent basis, it might not matter how much tip income is being received if there is no third party verification.

In general, lenders treat tip income just like any other in the way it can be verified and used for qualification. Lenders want to see a two year history of employment while showing the income is likely to continue. The income needs to come from a qualified source. The income must be received at relatively regular intervals.

If this sounds like you or someone you know and buying a home is definitely on the radar screen, it’s important to know ahead of time how to use this additional income. Lenders, employers and employees all know it’s there and available, but how it’s documented is important. If you don’t really need tip income to help qualify, then there’s no issue. But if tip income must be used, it’s crucial to properly document the receipt and keep an eye on reporting requirements.

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Should You Move Out During a Remodel?

Maybe you’ve been planning a remodel for quite some time, and you’re finally getting started. You might be doing a large-scale remodel to make your home more functional for your family, or perhaps the plan is to get it ready to sell.

Regardless of why you’re remodeling, there’s a big question that will arise: should you stay, or should you go? Meaning, should you move out while the work is being done?

The following are some of the things to think about as you decide.

Is Moving Out a Realistic Option?

If you have family or friends that are willing to take you in for a period of time, this may not be a concern, but otherwise, can you realistically afford to move out? If you’re paying several months of rent, for example, think about how much this will add to your total renovation costs.

It could be thousands or tens of thousands. That’s even if you can find a short-term rental for the window of time you’ll need.

Even if you technically have the money to move out and into temporary housing, could that money be put to better use in the remodel itself?

Do You Work From Home?

A lot of people work from home for the foreseeable future because of coronavirus. If you’re one of them, and perhaps your spouse is as well, you may need at a minimum a reliable place to work while renovations are going on.

Working in a construction zone can be even tougher than trying to live your day-to-day life in one.

Maybe staying throughout your renovation would cause your productivity to take such a hit that you just can’t manage it, in which case you might move out.

Staying Could Extend the Timeline

If you stay during a remodel, the contractor is going to have to work around you. They’re not going to be able to work hours that are as flexible such as in the evenings. They’re going to be building their schedule around yours, which might mean that it takes longer to finish things.

Plus, you’re taking up space, and your personal items are as well. That can slow down the process.

What Part of Your Home Are You Renovating?

Whether or not you move out can depend on your budget and timeline and what the project is. If you’re renovating something like a kitchen or bathroom, it can make more sense to move out. Otherwise, you may have to set up a temporary area of your home for essential functions like preparing snacks and meals.

Of course, if you’re doing a gut renovation you probably don’t have any choice. You’ll have to move out. Otherwise, in addition to the obvious downsides, you might also be exposed to toxic chemicals and fumes.

If you’re renovating something like a basement or a living area, you might not have to move. It could be that you can stay out of that area easily enough during the renovation. You just need to think about your needs and lifestyle.

Some homes have layouts that are more conducive to staying put during a renovation too. For example, maybe you have a multi-level house so you can confine most of your activities to one level or the other during renovations.

If you do stay in your home, but you restrict yourself to an area where work isn’t being done, you can rent a storage pod so you can completely empty the work area. This will keep your furniture and other items protected, and it will also make it easier for the people who are working.

Safety

Safety is another issue that is likely to sway you in one direction or the other. If you don’t have kids or pets, or your kids are older, this might not be a concern. If you do have kids or pets, staying in your home during renovations can be a safety concern.

The contractor and subcontractors should make an effort to keep their work areas sectioned off, but worksites are inherently risky.

If you’re trying to decide whether or not to move out during a remodel, there’s not one right answer that works for everyone. It depends a lot on how much you can tolerate in terms of inconvenience, your family and lifestyle, and the scope of the work being done.

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Mortgage Rates
Averages as of December 2020:


30 yr. fixed: 2.72%
15 yr. fixed: 2.28%
5/1 yr. adj: 3.16%








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Sharon Norton ABR CDPE
E-mail: sharon@soldinjackson.com
Website: www.soldinjackson.com
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