“Gross Income” For DTI Calculations; Adjusting W4; Tax Benefits

Most people know that lenders only look at “Gross Income” when evaluating Debt-to-Income (DTI) ratios. In other words, lenders evaluate a borrower’s income before taxes are taken out.

This sometimes makes no sense to borrowers b/c the payment they qualify for leaves them so little extra cash left over after they make their payment…IF they only look at their current take-home (after tax) pay.

The key in this analysis is to take into account the tax benefits from buying a house, and then understanding how to adjust “Take Home” pay.

Part of our Home-buyer Education process is both explaining the tax benefits from buying (in dollar terms), and coaching buyers to change their IRS W4 forms immediately after buying. This is very important. Increasing one’s “exemptions” allows one to “take home” more pay immediately and to therefore realize or appreciate the tax benefits from buying immediately. Buyers must understand this, or they will often be afraid to take on the housing payment they qualify for.