Income is just one of many things lenders will look at in determining if they want to lend money. Lenders could be interested in how much you get paid, what you are getting paid for, and whether or not there is a good chance that the source of your income will continue. Usually, your income is evaluated along with your current debts, your past credit history, the amount you wish to borrow, and all other aspects of your financial situation. By understanding this evaluation process, you will be better able to provide accurate information to the lender and select a monthly payment that you will be able to afford.<\/p>\n\n\n\n
Income provides lenders with an idea of whether you’ll be able to pay for another loan. The evaluation will depend on both the lender and the type of credit.<\/p>\n\n\n\n
A lender may request your gross monthly income (your pre-tax income), or some lenders may look at your net income (take-home), or how much money you have in your checking account with regular deposits. There are no minimum income requirements for all lenders. The requirements for each lender will vary depending on the type of loan, the amount of funds being borrowed, the length of time it takes to repay, etc.<\/p>\n\n\n\n
Regular income gives lenders an idea of how much money they will probably get back over time. Some people have regular paychecks that they receive every other week. Those types of paychecks create an obvious income pattern. People with freelance work, seasonal employment, or jobs as independent contractors (gig) typically do not receive the same amount in their monthly checks. This does not mean it is impossible for these types of income to be used to make a loan. The lender may request several months’ worth of bank statements so they can calculate a reasonable average.<\/p>\n\n\n\n
The frequency of your paycheck (weekly, bi-weekly, semi-monthly, or monthly) is one factor in determining whether the lender will approve an application for credit. The lenders need to know when you get paid so they can compare this to the time frame of repayment.<\/p>\n\n\n\n
Your income may be derived from several sources. These include: full-time employment, part-time employment, self-employed, working as a freelancer, retirement payments, social security, disability benefits, rent\/lease income, and other types of investment. When applying for credit, if you intend to use alimony or child support towards debt obligations, you should indicate this.<\/p>\n\n\n\n
Income by itself tells lenders what they can expect from your ability to pay for additional debt. Lenders often look at your monthly gross income and compare that against all other debt obligations you are currently paying on each month. The comparison is known as a debt-to-income (DTI) ratio.<\/p>\n\n\n\n
A general equation for this is:<\/p>\n\n\n\n
DTI = Monthly Debt Payments \/ Total Monthly Gross Income x 100<\/strong><\/p>\n\n\n\n If you had a monthly gross income of $3,000, and you were making monthly payments of $750:<\/p>\n\n\n\n $750 \/ $3000 x 100 = 25% DTI<\/strong><\/p>\n\n\n\n When you include a potential new loan, which was estimated to cost $275 per month, your total monthly payments would increase to $1,025:<\/p>\n\n\n\n $1025 \/ $3000 x 100 \u2248 34% DTI<\/strong><\/p>\n\n\n\n These calculations do not determine if a borrower’s application will be accepted; however, they do help borrowers understand how adding a new debt obligation can affect their current DTI.<\/p>\n\n\n\n Each lender has its own method for determining acceptable levels of DTI; some lenders may have higher or lower limits than others. In addition to looking at DTI, lenders may also evaluate the size of the applicant’s requested loan, the applicant’s past lending history, the length of time needed to repay the loan, and the type of credit being applied for.<\/p>\n\n\n\n A standard DTI calculation will normally include: Credit card minimum payments, auto loans, student loans, mortgages, other installment debt<\/a>, etc. The calculation does not always include all of the normal living expenses. Housing, food, utilities, insurance, transportation, medical expenses, etc., however, do impact how much you are comfortable paying each month.<\/p>\n\n\n\n Two individuals may share the same income and debt-to-income ratio (DTI); however, they could also have different monthly expense levels. By reviewing an individual’s complete budget, it will be possible to determine if a proposed payment provides adequate funding for that person’s normal living expenses.<\/p>\n\n\n\n Higher income may support a request for funding when other application details are sufficient to meet the lender’s requirements. In addition, it can indicate that more money is available for payment after existing debts have been accounted for. Although a high income does not guarantee approval for funding, lenders generally review the entire financial picture (income & expenses) rather than just income. They may approve higher amounts, charge lower interest rates, reduce fees, or offer better repayment terms.<\/p>\n\n\n\n Self-employment income (including freelancing), seasonal income, and gig economy income fluctuate by month. Lenders may instead review your history of income for a more extended time frame rather than relying solely on your most current payment. Bank statements, tax returns, W-2s\/1099s, profit & loss statements, invoices, and payment records can support documentation to demonstrate the applicant’s ability to earn money. The specific documentation required will vary based on the lender as well as the type of income earned.<\/p>\n\n\n\n Reviewing these historical records will assist lenders in estimating an average monthly income as well as reviewing changes in the applicant’s earnings over time. When applicable, part-time earnings may be taken into consideration if consistent and documented. Applicants who have multiple sources of income are expected to document all sources of income appropriately and provide all of the supporting documentation requested. Maintaining accurate and organized records of income can assist applicants in creating an honest and realistic monthly average. Accurate record keeping can also assist applicants in choosing a loan repayment amount<\/a> that is reasonable and will remain affordable during those times when income is less than at other times.<\/p>\n\n\n\n Federal Law (Equal Credit Opportunity Act) prohibits discrimination against applicants during a credit transaction based on an applicant’s characteristics, including if the applicant receives all or part of his\/her income through a public assistance program.<\/p>\n\n\n\n Creditors will generally not disregard or refuse to use qualifying income merely because it is from a public assistance program; however, the creditor may consider the amount of such income and whether the income is likely to continue.<\/p>\n\n\n\n It doesn’t necessarily mean that every benefit received by a person will be treated as if it were cash income or that an application must be granted approval.<\/p>\n\n\n\n For example, social security, disability, retirement, and pension payments can be considered where they are documented and are paid regularly. Generally, Supplemental Nutrition Assistance Program (SNAP) benefits are intended to purchase eligible food items and are usually not considered as cash income available for making debt payments.<\/p>\n\n\n\n When listing sources of income, applicants should provide accurate information about each separate source of income instead of grouping their benefits with other cash income. Treatment of that income can vary depending on the specific benefit being applied for, the particular lender involved, the type of credit sought, and which laws apply.<\/p>\n\n\n\n Documents that lenders may ask to see are usually based on the way a borrower receives their income, as well as the specific requirements of each lender’s loan application process. Typical documents that can be requested in this regard include:<\/p>\n\n\n\n It is not likely that all lenders would need all these items. Lenders could have access to many of these same pieces of information electronically, or they may use some other method of verification.<\/p>\n\n\n\n You may have limited ability to alter your income immediately; however, there is considerable information you can collect to provide lenders a clear view of your financial situation.<\/p>\n\n\n\n Do not overstate your income. Use your most up-to-date income numbers. Count all income you have permission to use and exclude income you no longer receive or for which you lack documentation.<\/p>\n\n\n\n Have some form of document available (recent pay stubs, bank statements, tax returns, etc.) that a lender can obtain if they need to verify your documents.<\/p>\n\n\n\n List your gross income per month, and list the amount of money you regularly spend on debt each month. This may give you an idea of how much of your income could go toward a new loan repayment based on the lender’s terms.<\/p>\n\n\n\n Your budget should include both your monthly expenses (housing, food, car, insurance, etc.) and monthly debt payments. Be certain your monthly budget allows enough space for these items once the loan repayment begins.<\/p>\n\n\n\n Depending on the lender’s terms, asking for less than what you really need may result in lower monthly payments and ultimately in fewer total payments needed to repay the loan.<\/p>\n\n\n\n If you earn a variable income, create a budget based on an estimated average monthly income. A payment that works out during your strongest months may be much more difficult to make when your income is low.<\/p>\n\n\n\n Your income will help determine if a lender will make you an offer; however, your ability to afford it will be based on all of the terms in that offer. Before you accept the loan, review:<\/p>\n\n\n\nLiving Expenses Also Matter<\/h2>\n\n\n\n
Does Higher Income Improve a Borrowing Request?<\/h2>\n\n\n\n
How Variable and Self-Employment Income May Be Reviewed<\/h2>\n\n\n\n
How Public-Assistance Income May Be Treated<\/h2>\n\n\n\n
Documents That May Be Requested<\/h2>\n\n\n\n
\n
How to Prepare Your Borrowing Request<\/h2>\n\n\n\n
Report Income Accurately<\/h3>\n\n\n\n
Gather Records Early<\/h3>\n\n\n\n
Calculate Your Current DTI<\/h3>\n\n\n\n
Review Your Complete Budget<\/h3>\n\n\n\n
Request Only What You Need<\/h3>\n\n\n\n
Plan for Changes in Income<\/h3>\n\n\n\n
Review the Complete Cost<\/h2>\n\n\n\n