There are difference aspects of the financial picture that are common in what makes a good mortgage loan. All of these elements have a degree of risk to the lender. Mortgage companies judge these risks and assign a credit grade to them. The higher the risk to the lender results in a higher rate to the borrower.

The discussion below is for mortgage loans that are of the plain, vanilla variety; that type of loan that doesn’t have any special characteristics.

We will review those risks associated with how lenders view income now:

What does the Borrower do for his living?

The length of time that a borrower has been on the job is important for this part of the risk on extensions of credit.

Someone who has worked in a field for ten years will get more consideration, on this point, than someone who has been at a job for only two years.

The possibility of future advancement and income in the chosen field is also considered, so the type of work is also very important.

One who is in the medical field, such as an x-ray technician, will have a range of what those in the field make. There is a high and a low range and most x-ray techs fall into this category. There isn’t a huge difference in pay for one who has been in the field for three years as opposed to thirty years, so the income isn’t considered as one where large raises might be expected.

Another consideration in the medical field is whether or not there is overtime income. Much of the time, this must have been regular income over at least the past two years to be counted as part of the income for loan purposes.

Someone in the construction field could make anywhere from starting level income to being a contractor making some really serious money.

What the income will be would depend on years in the field and if that person is self employed or not. Self employment in this field could give weight to the “serious money” as was discussed above.

A salaried person will have specific tiers for the kind of work that they do and the type of advancement in pay that can be expected in their field.

Depending on the field and how long a person has been self employed, there can be a very wide range of what a person earns.

Typically, lenders will want to see a person self-employed for at least two years in order to consider the income. We would be analyzing the past two years income tax returns and having the borrower provide Profit & Loss statements for year-to-date income and tax returns for previous years. Whatever the borrower has written off as business expense will affect the bottom line of their usable income for loan purposes. A borrower who has written off half of their income “pays” here.

Stated Income loans have been used a lot over the past five years or so, and self employment could make for a fairly easy loan process. For the most part, this can still work well as long as the borrower has credit scores of 680 and above.

A salaried borrower will be considered a professional sort and income from salary can be usually used immediately upon being hired. For someone who has graduated from college or a trade school, salaried income can be used immediately.

For someone who works at an hourly rate, the income is figured at the hourly rate times 40 hours per week. That sum is multiplied by fifty two weeks and then divided by twelve to determine the monthly income. Overtime income will need to have been earned for at least two years in order to be considered for borrowing.

In the past 90 days, lenders have tightened up on how much a borrower's income can be spent on the house payment and payments on any other long-term debt.

The loan program and the loan profile will make a big difference to the lender in what ratios are acceptable. The standard FNMA ratios are 27/36, and in California, 33/38. This means that the borrower can spend 33% of his gross income on the housing expense and up to 38% of his total gross income on housing and any long-term debt.

The housing expense includes loan payments, property taxes, hazard insurance, and any home owner’s association dues. Long term debt would be any student loans, car payments, and minimum payments on credit card debt are the majority of what is considered long term debt.

With automated underwriting and compensating factors, those ratios can be stretched quite a bit. I recently was able to get a borrower approved with ratios of 35/55. The great compensating factors were a long pattern of being able to save money and having been in the same field for many years.

“Tune in” October 15^th for the fifth installment. We will be discussing borrower assets.