HOME MUCH HOUSE CAN I AFFORD
About 99 percent of home buyers borrow money to buy their home. Even if you did not fall into this group of buyers you may not want to pay cash for a home because you would give up the tax benefits. The critical question is HOW MUCH CAN YOU AFFORD TO BORROW?
About 99 percent of home buyers borrow money to buy their home. Even if you did not fall into this group of buyers you may not want to pay cash for a home because you would give up the tax benefits. The critical question is HOW MUCH CAN YOU AFFORD TO BORROW?
How Much You Make and How Much You Spend
Before lenders will give you a loan, they will carefully review the money you make and the money you spend. The first thing you should do in figuring out how much money you can spend on a home is to determine your yearly and monthly gross income.
Your monthly gross income is the amount you earn each month before taxes. For example, if you earn 36,000 dollars per year, you gross 3,000 dollars each month (36 ÷ 12 = 3). If you and your partner’s combined gross income is 60,000 dollars per year, you gross 5,000 dollars each month (60 ÷ 12 = 5). Your net income is a completely different story. Your net income is what you have left of your gross income after you pay your taxes and your monthly bills. This section explains how to gather the information you need and then how to calculate gross and net income.
Gathering Income Information
To start, gather all your paycheck stubs and income information from your current job. If you plan to buy a home with a partner, gather income information for this person as well. Make sure you also locate past income tax forms; you can expect to show them when requesting a loan from the bank.
Most lenders will consider only income that can be verified—from your employer or past tax returns. If you have other income from freelance work or the sale of furniture that you make in your woodshop, gather that information also. Make sure that this additional income is money that you have paid taxes on; otherwise, the lender will not consider it.
If you have other income from bonuses, know that bonuses don’t always count. This is because bonus money is not always guaranteed. If you want to have your bonus money considered as part of your gross salary, you need to prove that bonuses are a regular part of your pay. You must show a track record of receiving bonuses for two years. Another way to include bonuses in your total is to have your employer write a letter saying that the bonus is dependable income. If you receive alimony or child support, you can include this money in your total if you want. You must show that this is a dependable source of income and will be continuing for a minimum of three years. You may need a settlement statement from your divorce that states the amount you receive. Keep in mind that lenders will look for an average income. They will want to evaluate your income from the past two years to make sure it has been steady, and they will take into consideration any seasonal jumps. Usually two years of continuous employment proves to lenders that you have a steady income. If you have had multiple jobs in the past two years, lenders may require that you write a letter as to why you have switched jobs often. In addition, if you’re recently out of college, lenders may take into consideration your future earning power. continued
Before lenders will give you a loan, they will carefully review the money you make and the money you spend. The first thing you should do in figuring out how much money you can spend on a home is to determine your yearly and monthly gross income.
Your monthly gross income is the amount you earn each month before taxes. For example, if you earn 36,000 dollars per year, you gross 3,000 dollars each month (36 ÷ 12 = 3). If you and your partner’s combined gross income is 60,000 dollars per year, you gross 5,000 dollars each month (60 ÷ 12 = 5). Your net income is a completely different story. Your net income is what you have left of your gross income after you pay your taxes and your monthly bills. This section explains how to gather the information you need and then how to calculate gross and net income.
Gathering Income Information
To start, gather all your paycheck stubs and income information from your current job. If you plan to buy a home with a partner, gather income information for this person as well. Make sure you also locate past income tax forms; you can expect to show them when requesting a loan from the bank.
Most lenders will consider only income that can be verified—from your employer or past tax returns. If you have other income from freelance work or the sale of furniture that you make in your woodshop, gather that information also. Make sure that this additional income is money that you have paid taxes on; otherwise, the lender will not consider it.
If you have other income from bonuses, know that bonuses don’t always count. This is because bonus money is not always guaranteed. If you want to have your bonus money considered as part of your gross salary, you need to prove that bonuses are a regular part of your pay. You must show a track record of receiving bonuses for two years. Another way to include bonuses in your total is to have your employer write a letter saying that the bonus is dependable income. If you receive alimony or child support, you can include this money in your total if you want. You must show that this is a dependable source of income and will be continuing for a minimum of three years. You may need a settlement statement from your divorce that states the amount you receive. Keep in mind that lenders will look for an average income. They will want to evaluate your income from the past two years to make sure it has been steady, and they will take into consideration any seasonal jumps. Usually two years of continuous employment proves to lenders that you have a steady income. If you have had multiple jobs in the past two years, lenders may require that you write a letter as to why you have switched jobs often. In addition, if you’re recently out of college, lenders may take into consideration your future earning power. continued
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