Applying for a mortgage is no small task. Besides individual differences in an applicant’s qualifications, there are differences in how lenders consider income. Lending giants Freddie Mac and Fannie Mae impose their guidelines on income interpretation and what is considered to qualify on smaller lenders, but even these lenders vary among their application of these rules.
While most people assume that mortgage loan applications are evaluated solely on a salary, there is quite a bit more that goes into the final determination. In order to minimize lending risks and the chances of default or foreclosure, lenders look at several things. First, is the straight salary derived from employment, which is used as an overall evaluating factor in determining eligibility. However, this measure is the basis for additional criteria.
Next, is employment and salary history. Lenders want to see how long an applicant has had a job and whether there is any trend in salary, preferably upwards. Last, is what type of employment the applicant holds. Small business owners or the self-employed may have a more difficult time when applying for a mortgage. Many lenders will require documentation of a longer salary history and take a closer look at income based on the business’ Schedule C tax form. Here lenders will evaluate profit and loss statements in order to gain a more adequate representation of income.