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Income is one of the most significant factors a lender considers when making a loan decision. To ensure that you have enough income to qualify for your loan, it's a good idea to calculate all of your sources of a qualifying income, both taxable and nontaxable.
Income and Loans
Traditionally, when you go in and apply for a home loan, the lender considers only taxable sources of income. This is income that you earn from employment, and from sources such as royalty payments, investment income or rental income. The lender adds up all of this income for the entire year, then divides that amount by 12 to determine your monthly income amount. Many people have income that comes from other, nontaxable sources. You are still able to receive a loan if your income is derived from nontaxable sources.
Child Support Payments
Child support payments you receive are a common form of nontaxable income. For this income to qualify for your loan, a few criteria generally must apply. You usually need a written agreement from the paying party stating the amount the party pays and how frequently he pays. You may also need to show proof that you have been receiving these payments for a fairly long time -- usually between six months and one year, according to the Federal Housing Administration. Also, the payments must be continuing for three years after you sign the loan. The lender will not allow this income if you have child support payments that are about to be discontinued in a few months.
Nontaxable Retirement Income
Sometimes nontaxable income comes in the form of retirement income, such as income that comes from the Veterans Administration. In this case, the lender would need to see your award letter showing the amount you receive, the frequency of payment, and the length of time you receive payment. Some lenders may ask you to show receipts or a bank statement, proving you have received this income for a set amount of time, often between three months and one year.
If you regularly receive a monetary gift from another party who does not reside with you in the same household, some lenders may count this as income. You must be receiving this money in regular intervals -- weekly, monthly, quarterly or annually -- and you must be able to prove that you receiving this income for a specific period of time. Welfare assistance payments and insurance income may count towards your income as well, depending on the lender.
Total Income and Considerations
After adding up all of your sources of nontaxable income for the entire year, divide that amount by 12 to get a monthly amount. After that, you can add your nontaxable income to your employment income and other forms of taxable income to get a total income amount. Generally speaking, a typical lender is looking for an individual who has an income at least three times higher than the amount of debt -- that is, a debt-to-income ratio percentage in the low 30s. The lender ignores factors such as your age, gender, or whether or not your receive public assistance. The Equal Credit Opportunity Act prevents lenders from discriminating against borrowers based on any of these factors. The lender does evaluate your credit reports. A high credit score certainly puts you ahead of the game, but if you have mediocre credit, a higher income and a low debt-to-income ratio may be enough to get an approval.
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