One of the most important factors that mortgage lenders consider when evaluating a borrower’s creditworthiness is their income. But when it comes to determining whether a borrower can afford a mortgage, lenders will often look at different types of income. Specifically, they may consider both net and gross income. But which one do they use for approval?
What is Gross Income?
Gross income is the total amount of income that a borrower earns before any deductions or taxes are taken out. This includes their salary, bonuses, commissions, and any other income they receive from their job or other sources. In other words, it’s the amount of money a borrower makes before any expenses are subtracted.
What is Net Income?
Net income is the amount of money a borrower takes home after all taxes, deductions, and other expenses are subtracted from their gross income. This includes things like income taxes, Social Security, Medicare, and any other deductions that may apply.
Which One Do Mortgage Lenders Use for Approval?
When it comes to mortgage approval, lenders will typically use a borrower’s gross income to determine their ability to make mortgage payments. This is because gross income is a more accurate representation of a borrower’s earning potential, as it reflects all of their income before any deductions are taken out.
However, lenders may also consider a borrower’s net income when evaluating their overall financial situation. This can be especially important if a borrower has significant expenses or debt that could impact their ability to make mortgage payments.
Why Does Gross Income Matter for Mortgage Approval?
There are several reasons why mortgage lenders use gross income to determine a borrower’s ability to make mortgage payments. First, it provides a more accurate picture of a borrower’s earning potential, which can help lenders determine whether they can afford to make their monthly mortgage payments.
Additionally, gross income can provide lenders with a better understanding of a borrower’s overall financial situation. For example, if a borrower has a high gross income but also has significant expenses or debt, this may indicate that they are not financially stable enough to take on a mortgage.
What Other Factors Do Mortgage Lenders Consider?
In addition to income, mortgage lenders will also consider other factors when evaluating a borrower’s creditworthiness. These can include their credit score, debt-to-income ratio, employment history, and the size of their down payment.
Credit score is a measure of a borrower’s creditworthiness and is based on their credit history. A higher credit score can make it easier for borrowers to qualify for a mortgage and secure a lower interest rate.
Debt-to-income ratio is a measure of a borrower’s ability to manage their debt payments and is calculated by dividing their monthly debt payments by their gross monthly income. A lower debt-to-income ratio can indicate that a borrower is more financially stable and can better afford a mortgage.
Employment history is also important for mortgage lenders, as it provides them with a better understanding of a borrower’s earning potential and stability. Borrowers with a stable employment history may be more likely to qualify for a mortgage and secure a lower interest rate.
Conclusion
When it comes to mortgage approval, lenders will typically use a borrower’s gross income to determine their ability to make mortgage payments. This is because gross income provides a more accurate representation of a borrower’s earning potential and overall financial situation. However, lenders may also consider a borrower’s net income when evaluating their overall financial stability. To improve their chances of securing a mortgage, borrowers should focus on maintaining a high credit score, managing their debt effectively, and maintaining a stable employment history.