borrower can prove that it was only temporary and they got off unemployment in a relatively short amount of time, the lender should be fine with the loan. As always, the lender is simply looking to make sure the borrower is likely to be able to pay their bills in the future, and can be flexible. Finally, yet another form of income is bonus income. This is usually the kind of income people who work sales jobs rely on. In some situations, salespeople will make a small weekly salary that is barely enough to live on, but make the bulk of their money from commissions. This puts them in the same situation as the contract laborers, with their income varying all over the year. As before, the lender is going to want to see at least two years of consistent income from a borrower in this situation.
THE DEBT-TO-INCOME RATIO
A quality lender will take a borrower’s debt-to-income ratio very seriously. The debt-to-income ratio is a mathematical calculation of how much a person is required to pay in debt payments per month compared with their total pre-tax monthly income. For example, let’s assume a borrower has a $1500 mortgage, a $400 car loan, $500 in student loan payments, and another $600 of miscellaneous responsibilities (car insurance, credit card payments, etc.). That borrower has debt that totals $3000 per month. Let’s also assume that the borrower makes $72,000 a year, or $6000 per month. A lender would calculate the debt-to-income ratio of this borrower as 50%, since $3000 of debt is 50% of $6000 in income. For major lenders, i.e. large banks that sign thousands of mortgages per year, this debt-to-income ratio is too high to get what’s referred to as a “qualified mortgage.” A qualified mortgage is a loan that is considered to be the most stable and at the lowest interest rates. Lenders like qualified mortgages because they are
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