___ Real median household income in the United States fell 3.6 percent between 2007 and 2008, from $52,163 to $50,303. This breaks a string of three years of annual income increases and coincides with the recession that started in December 2007.

___ The nation’s official poverty rate in 2008 was 13.2 percent, up from 12.5 percent in 2007. There were 39.8 million people in poverty in 2008, up from 37.3 million in 2007.

___ The number of people without health insurance coverage rose from 45.7 million in 2007 to 46.3 million in 2008, while the percentage remained unchanged at 15.4 percent.

In essence these numbers mean that it will be very difficult to restore the housing market until incomes rise to former levels. Why? Because we typically qualify buyers for mortgage financing on the basis of their income with front and back ratios that compare housing costs to gross monthly income (the front ratio) and a second measure that compares housing costs and other monthly expenses against gross monthly income (the back ratio).

We might say, for example, that Smith can use up to 28 percent of his gross monthly income for housing costs and up to 36 percent of his gross monthly for housing costs, car payments, student loans, etc. His qualifying ratios would be 28/36.

If his income goes from $52,000 to $50,000 and the qualifying ratios remain the same then the result will be fewer dollars each month in gross income and thus less money to pay for housing and other costs. The result is an ability to only qualify for a smaller loan.

Income. It really counts.

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First, they want to assure that the income you claim in your loan application is also the income you report to the IRS.

Second, if you are self-employed lenders may be able to “add back” items which are deductible for tax purposes but can be a mortgage application credit. For example: you are self-employed, work at home, and deduct part of your residence for business purposes. That can be a proper tax deduction, but lenders will add the amount deducted to your loan application income total.

Third, if a loan goes sour and must be foreclosed, lenders want a record in hand showing how the loan was underwritten.

Fourth, if a loan is sold, it may be among hundreds or thousands purchased at one time. The new owner will audit loans at random to assure they meet agreed standards. Part of the audit process can include a review of the underwriting file used to support the loan approval, including the tax records.

Under the Wall Street Reform Act lenders are required to verify income to qualify for the safe harbor provisions of the law. This means they will invariably ask for tax returns, W-2s and other evidence of income.

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What lenders do expect is that prospective borrowers will have debt which is within their means — not too much in total, and not too much in terms of monthly payments and always paid in full and on time.

Generally, borrowers get better credit scores by having credit cards — but having credit cards with small balances or no balances.

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For details, speak with loan officers.

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If you were called up under Title 32 you may not qualify for VA mortgage financing. Title 32 is apparently used to call up support personnel not going overseas or to the front.

Do NOT make an offer on a property until you have first confirmed your ability to qualify for a VA loan. For specifics, speak with your base housing officer or the VA. Get paperwork that you can show lenders up front, before you go house hunting or refinance, and prequalify for a mortgage.

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The “front” ratio is generally equal to your monthly costs for principal, interest, property taxes, and property insurance (what lenders call “PITI”). The “back” ratio includes the front ratio plus all regular monthly costs such as credit card payments and auto payments.

For example, Hall has a household income of $6,000 a month. With a conventional loan, a lender might allow ratios of “28/36.” The front ratio is “28.” This means 28 percent of Hall’s pre-tax income can be used for principal, interest, taxes, and insurance. In this case, 28 percent of $6,000 is $1,680 per month.

The back ratio is “36.” This means lender guidelines will allow Hall to devote 36 percent of $6,000, or $2,160 a month, to PITI plus regular monthly costs for items such as credit card debt, auto payments, etc.

Different programs use different front and back ratios: basic FHA loans are at 31/43 while VA ratios are more liberal at 41/41. Some ARM programs use 33/38 ratios.

Program ratios can be elastic. For instance, the use of energy efficient appliances and construction can help liberalize ratios, sometimes by 2 percent. This can be important for those trying to meet qualification standards.

In recent years, lender guidelines for many programs have become more liberal — meaning that more can be borrowed with a given income. For details, speak with lenders and real estate brokers.

What Are “Front” and “Back” Ratios? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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There are some qualifications. For instance, it must be expected that your income will continue at or above current levels.

It’s possible that your income for mortgage qualification purposes is even higher than the income reported for tax reasons. For example, if you rent real estate to others lenders will add back the depreciation you claims and thus increase your qualifying income.

Speak with lenders for specifics.

What Is “Qualifying Income” For A Mortgage Loan? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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