Puyallup First Time Home Buyer Seminar - Part III Income

Welcome once again to the Puyallup First Time Home Buyer education forum. Parts I & II of this series focused on Credit, and Employment, so now it is time to go over Income, which is really something of a subset of employment. The issue of Income for the purpose of getting a home loan, centers on what are referred to as Debt to Income ratios. There are two ratios that need to make sense; the Housing Ratio, and the Total Household Debt to Income ratio.

Keep in mind, the housing payment used for calculating any of the ratios is a "full" payment, meaning it contains the Principal & Interest payment for the loan, the monthly portion of property Taxes, and homeowners Insurance (PITI). There can also be monthly Home Owner's Association dues if you buy in a Planned Unit Development where there are common assets requiring maintenance, such as neighborhood playgrounds.

The traditional target for the Housing payment for my Puyallup & Pierce County home buyers is 28% or less of a persons Gross Income (total wages before taxes). In other words if your total gross income were $2,000/Mth the traditional target payment would be $560, or less. Remember, Gross income is not what you receive on your paycheck, but the total earned before deducting for income taxes, social security taxes, insurance, and any other items such as union dues. If you get paid by the hour, and work full time, you can calculate your monthly gross income by multiplying the hourly rate by 2080, and then dividing by 12 (this is the equivalent of 40 hours x 52 weeks divided by 12 months). Multiply that gross income times 0.28 to figure the target payment. If you routinely get overtime, you may be able to use that income for qualifying, but not typically.

Once that is calculated, we need to look at the total household debt situation. This is the sum of adding your prospective housing payment to all the debts shown on your credit report. This is NOT the true total of your monthly household debts, only what shows on a credit report. For example, if you have a $200/Mth car payment, plus a credit card with a $1000 balance that you pay $100/Mth on we will not calculate your ratio on $300 in payments per month. The credit report will only show the minimum acceptable monthly payment amount which might be just $35 so your monthly bills would be $235 plus the projected payment for the loan. The target for the combined amount of these payments is 41%, but with good credit, 45% and even 50% can be acceptable. This higher allowable percentage goes for both the Housing Ratio, and the Total Debt ratio. If you have really good credit, underwriting approval is more lenient because they assume you know what you're doing because you have good credit.

Another aspect to keep in mind is that many regularly recurring monthly bills do not appear on your credit report. Along with the car payment comes a fuel bill, and insurance. There is also Food, Clothing, Utilities, daycare, Water, Sewer, Garbage, etc. that are not shown on your credit, but still need to be paid each month. My Fort Lewis, and Air base McChord (now Joint Base Lewis-McChord) VA loan buyers will find that VA also takes into account an amount they expect necessary for the home's monthly maintenance, and utilities expense. While these other expenses are not part of the underwriter's approval process, they need to be addressed by both you, and your loan officer to give yourself the best chance for long term success.