I specialize in Kentucky First Time Homebuyers FHA, VA, USDA & Rural Housing, KHC and Fannie Mae mortgage loans. I have helped over 1300 Kentucky families buy their first home or refinance their current mortgage for a lower payment; Kentucky First time buyers we still how available down payment assistance with KHC. Free Mortgage applications/ same day approvals. Web site is not endorsed by the FHA, VA, USDA govt agency. Text/call 502-905-3708 kentuckyloan@gmail.com NMLS 57916 NMLS 1738461
Income is the cornerstone of mortgage underwriting. Lenders evaluate your income based on type of work, employment length, education requirements, and advancement potential. The primary goal is determining the likelihood your income will continue.
Salary & Hourly Wages
Requirement: Calculated on a gross monthly basis (before income tax deductions). Must show 2-year employment history with your current employer.
Part-Time & Second Job Income
Requirement: Usually not considered unless in place for 12-24 consecutive months. Lenders view part-time income as a strong compensating factor when properly documented.
Commission, Bonus & Overtime Income
Requirement: Can only be used if received for two previous years with employer verification of continuance. Lenders use a 24-month average figure for calculation.
Retirement & Social Security Income
Requirement: Must continue for at least three years into the future. Tax-free income can be "grossed up" by multiplying the net amount by 1.20% for qualifying purposes.
Alimony & Child Support Income
Requirement: Must be received for the 12 previous months and continue for the next 36 months. Lenders require divorce decree and court printout verifying on-time payments.
Rental Income from Investment Property
Requirement: Cannot come from roommates. Lenders use 75% of monthly rent minus ownership expenses. Schedule E of tax return verifies figures. Recently-rented properties require current month-to-month lease copy.
Self-Employment Income
Requirement: Minimum 2-year business ownership required as a representative sample. Lenders use 2-year average monthly income from Adjusted Gross Income. May add back depreciation and one-time capital expenses. Self-employed borrowers often face challenges with high expense write-offs.
2. Debt & Liabilities: Cash Flow Analysis
Lenders review all liabilities to ensure sufficient income remains for your mortgage payment after existing debts are paid. This is critical for loan approval.
What Counts: All loans, leases, and credit cards are factored into calculations.
What Doesn't Count: Utilities, insurance, food, clothing, schooling, and childcare expenses.
Short-Term Loans: Debts with less than 10 months remaining are usually disregarded.
Credit Cards: Minimum monthly payment listed on statement is used—not your actual payment amount.
Co-Borrowed Debts: If you co-borrowed for a friend or relative, you're accountable. You can exclude this debt only if you show 12 months of on-time cancelled checks from the co-borrower.
⚠️ Important: Paying off loans may help you qualify, but credit cards often cannot be paid off before closing. If a credit card is paid off, the credit line still exists, and you could accumulate new debt after loan closure.
3. Credit History: Past Performance Predicts Future Results
Lenders use a residential merged credit report (RMCR) from the three major credit bureaus: TransUnion, Equifax, and Experian. This blended report searches public records for liens, judgments, bankruptcies, and foreclosures.
FICO Scores & Credit Requirements
Most lenders use the FICO score system to evaluate credit risk. Credit scores typically range from 400 to 800, with higher scores resulting in better rates and terms.
Conventional (Fannie Mae/Freddie Mac)
Minimum FICO: 620 for up to 80% LTV. Below 680: Maximum 80% LTV. Additional rate hits for lower scores.
FHA Loans
Minimum FICO: 620 (2026 requirement). More flexible with 12+ months positive credit history.
VA Loans
Minimum FICO: 620. No maximum LTV. Residual income requirements apply.
USDA/Rural Housing
Minimum FICO: 620. Agricultural and rural property eligibility required.
Credit Rules of Thumb
Positive Credit: 12+ months of positive credit usually equals "A Paper" loan approval, depending on overall credit profile.
Collections & Charge-Offs: Unpaid collections, judgments, and charge-offs must be paid before closing on "A Paper" loans. Only exceptions: death of primary wage earner or medical expenses.
Payment Plans: If you've negotiated an acceptable payment plan with 6-12 months on-time payments, lenders may not require full payoff before closing.
Reporting Period: Most credit items report for 7 years. Bankruptcies expire after 10 years.
Credit Event Wait Times for Approval
Foreclosure: 5 years from completion date. Years 5-7: 10% down + 680 FICO minimum for primary residence purchase.
Short Sale (Pre-Foreclosure): 2 years from completion date (no exceptions).
Deed-in-Lieu of Foreclosure: 4 years from execution date.
Chapter 7 Bankruptcy: 4 years after discharge/dismissal with reestablished credit and perfect credit maintained.
Chapter 13 Bankruptcy: 2 years from discharge or 4 years from dismissal.
Multiple Bankruptcies: 5 years from most recent dismissal/discharge for multiple filings within 7 years.
⚠️ Note: The good credit of a co-borrower does not offset bad credit from the primary borrower. Changes to lending standards occur regularly, so guidelines vary by lender.
4. Savings & Down Payment Sources: Financial Stability
Lenders evaluate savings for three key reasons: (1) greater reserves after closing increase on-time payment probability, (2) most programs require minimum borrower contribution, and (3) lenders want assurance you've invested your own money, making you less likely to walk away.
Acceptable Down Payment Sources
Checking & Savings: 90 days seasoning required in bank account. Documents must show funds are yours (not borrowed).
Gifts & Grants: Permitted after your minimum contribution. KHC down payment assistance and family gifts are common sources.
Sale of Assets: Personal property can be sold for required contribution. Property must be appraised, with bill of sale, received check copy, and deposit slip required.
Secured Loans: Loans secured by property are acceptable closing fund sources.
Retirement Accounts: IRA, 401k, Keogh & SEP funds accessible without penalty are acceptable sources.
Sale of Previous Home: Must close before new home purchase for funds to be used. Requires listing contract, sales contract, or HUD-1 closing statement.
⚠️ Not Typically Accepted: Sweat equity and cash-on-hand generally aren't acceptable, though FHA programs allow these in special circumstances.
5. Debt-to-Income Ratio: The Critical Qualifier
Your debt-to-income (DTI) ratio is one of the most important factors in underwriting. Lenders have determined that your house payment should not exceed approximately 30% of your gross monthly income (front-end ratio). Your total debts—including mortgage, plus minimum revolving and installment payments—should not exceed 40% of gross monthly income (back-end ratio). This varies from 35-41% depending on financing source.
Real-World Example
DTI Calculation Example
Scenario: Borrower with $4,500 gross monthly income and existing debts.
Step 1: Calculate Front-End Ratio (Housing Only)
$4,500 × 30% = $1,350 maximum mortgage payment
Step 2: List Existing Monthly Debts
Car Payment ............... $500
Visa Credit Card .......... $20
Sears Credit Card ......... $30
Master Card ............... $75
─────────────────────────────
Total Existing Debts ..... $625
Maximum Debt Allowed ... $1,800
Existing Debts ......... - $625
─────────────────────────────
Maximum Mortgage ....... $1,175
✓ Borrower qualifies at $1,175, NOT $1,350
Key Takeaway: High existing debt limits your mortgage payment qualification, even if your income would otherwise support a higher payment. Consider paying down debts before applying.
Ready to Get Pre-Approved for Your Kentucky Mortgage?
As a mortgage specialist with over 20 years of experience helping more than 1,300 Kentucky families achieve homeownership, I'm here to guide you through the underwriting process.
