Money Moves with G: Your Income Isn't the Whole Story

Key Takeaways

• Two people who make the exact same amount can have completely different buying power
• Lenders look at three big pieces: income, debts and credit
• Your debts count against the room you have each month, not just your housing payment
• Credit is more than a score: late payments, bankruptcies and defaults on federally owed loans such as student loans can all affect qualification
• The money move: ask what your entire financial picture looks like, not just what you make
• Next week: the difference between pre-approval and pre-qualification

Summary

Grafton Sizemore picked up Money Moves with G after Rachel Brantingham's housing update. He opened with his disclaimer, as he does every week, and then took on a question lenders hear constantly: "Well, this is how much I make. I should be able to get pre-qualified for this."

His answer is that income is only a small piece of the picture. What you make, what you owe each month and what your credit history looks like all go into what you can qualify for.

Full Article

Grafton started with his own housekeeping. He is a team loan officer at Motto Mortgage in Elizabethtown, NMLS number 2068414. "I am not a financial planner. I am not an investment advisor. Nothing I say here is advice. It's all just opinion and recommendation. It's education and it's not a quote and offer. And it's definitely not a pre-approval or a pre-qualification," he said. If you want one of those, he said, you have several ways to get his number and give him a call.

Last week's segment was about pre-qualification, and he promised to get to the difference between that and pre-approval next week. This week he wanted to cover something people do not think about a lot.

Two people, the same income

"The biggest thing that people have a hard time kind of grasping is, well, this is how much I make, I should be able to get pre-qualified for this," Grafton said. "And the truth is, I can promise you that two people can make the exact same amount of money and have completely different buying power."

Whether someone says they make $100,000 or $50,000 a year, he said, the amount you make is a very small piece of the picture lenders use to understand what they can qualify you for. And your credit score is not the only other piece.

Piece one: income

Income is number one, because the lender has to know what you bring in each month. Grafton said they use your gross income, before taxes and before things like prepaid insurance or retirement contributions come out. To keep the numbers easy, he used a hypothetical $60,000 a year salary, which is $5,000 a month. From that monthly figure, depending on the credit and the loan type, lenders can usually count somewhere between 45 and 50 percent toward debts.

Piece two: debt

That room is for all of your debts, not only housing. A car payment, minimum credit card payments and student loan payments all count. "All those things are taken into consideration," Grafton said. What is left over after those other debts is what is available for a monthly house payment.

That is why debts are number two on his list. "If you're bringing in a hundred thousand dollars, do you have $2,000 of debt a month? Do you have no debt a month? Do you have $4,000 of debt a month where we can't get you qualified for something because there's not enough room there?"

Piece three: credit

The third piece is the one he says everybody thinks is the entire picture: your credit score and the lender pulling your credit. It is not just the score, Grafton said. Lenders also look at the risk on your credit profile: whether you have been late on payments, especially mortgage payments, and how many of those you have had in the past year or the past two, three or four years.

The lower the score, or the more risk factors that are there, the more it can limit what a lender can qualify you for. And there is one nobody talks about, he said: bankruptcies, and any defaults on loans, especially student loans or other loans owed to the federal government.

Most lenders run all of this through an automated underwriting system, Grafton explained, because most loans are backed by the federal government, whether through Freddie Mac, Fannie Mae or the federal housing agencies.

The Money Move

"So when somebody says, I make this much, this is my debts, how much can I get qualified for? It's just not always that simple," Grafton said. "Every single scenario is different."

His money move for the week: stop asking only what you make. "What's your financial picture look like as a whole? Because that's what determines your buying power." Two people can both make $100,000 a year, he said, and one may qualify for a house while another may not be able to qualify at all, "because what you make is not everything. It's the entire financial picture."

Grafton said the segment gives an idea of how loan officers decide what they are able to do and which risk factors they can take on. Next week: the difference between a pre-approval and a pre-qualification.

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