There’s more to providing proof of income than just handing over a couple of payslips. You need to be able to show your earnings are stable. When making a repayment, you may have to be able to show the source of that money as well. If you’re a recent graduate who’s landed a well-paying job, someone who recently switched careers or just started a business, you could have trouble qualifying for a conventional mortgage no matter how much you’re earning, unless you can show your earnings are stable.
What are the income requirements for a mortgage?
Let’s start with the basics – how much income do you need to qualify? Here, it’s not a question of how much you earn, but how much of your income you’ll be spending on your home loan and other debt payments.
The oft-cited rule is that your monthly mortgage payments – include property taxes and homeowner’s insurance – shouldn’t exceed 28 percent of your gross income. Total debt payments, adding in things like credit cards and a car loan - shouldn’t exceed 36 percent. These are called your debt-to-income ratios.
Those figures are not hard-and-fast, however. Most lenders will readily allow debt-to-income ratios of 43 percent for borrowers with good credit, and even higher if other factors are present, such as a large down payment or if the borrower has substantial financial reserves.
Not sure if you have enough income? A mortgage income calculator can help you crunch all the numbers from your earnings, monthly debt payments, housing expenses to find out how much income you need for a mortgage of a certain amount and interest rate.
Providing proof of income
To verify your income, your bond originator or bank will likely require a couple of recent paycheck slips (or their electronic equivalent). In some cases the lender may request a proof of income letter from your employer, particularly if you recently changed jobs.
Another form of income verification will be your last two years of tax returns, which the lender will obtain directly from the SARS. You’ll be asked to sign a form to authorize the SARS to release them to your bond originator.
Your originator and bank will want to see at least two years of steady income before they’ll authorize a homeloane. That means no gaps in employment during that time. It’s ok if you’ve changed jobs, but only if you stay in the same field. If you recently made a major change - say, leaving a sales job to become a teacher or vice versa – you may be turned down if you’ve been there less than two years. These days, mortgage lenders are all about stability and they’ll want to be assured that your new career is working out before approving your loan.
Proof of income for the self-employed
Tax returns are the main form of income verification for the self-employed, though you may also be required to file a profit-and-loss statement for your business. Once again, they’ll want to see at least a two-year history in the business, with stable or rising income.
They’ll take your average income over the past two years, so total that and divide by 24 to get your monthly income for mortgage qualification purposes. Keep in mind, though, that any business deductions you take on your federal tax return lowers your income for purposes of obtaining a mortgage - which often limits self-employed people to a smaller mortgage that they might like and still comfortably afford.
One way around this is to seek a stated income mortgage through a private lender, rather than a more conventional mortgage backed by an entity like the FHA, Fannie Mae or Freddie Mac. Stated income loans are much harder to find than they were during the housing bubble of the early 2000s, but some specialty lenders still offer them. You’ll pay a premium rate and will need excellent credit and substantial financial assets to qualify, but it is an option for obtaining a larger mortgage when you’re self-employed.