When applying for a mortgage loan, your lender will consider many financial factors, including discretionary income. They will pay attention to this number, as it’s the money you have available towards a down payment and other costs.
Here’s what you should know:
Discretionary Income Is Not Disposable Income
Before we jump into what discretionary income is, you must remember that while related, it’s not the same thing as disposable income.
Disposable income is the net amount you receive in your paycheck after income taxes. On the other hand, discretionary income is your disposable income minus all necessary payments like utilities, car payments, and house payments.
A Gauge Of Financial Stability
Discretionary income is a good gauge of financial stability, as it is used at your discretion for things like investing and taking a vacation. Use of a credit card does not count towards your total discretionary income.
You can increase your discretionary income by reducing the number of basic expenses or increasing gross earnings within your household.
Discretionary Income Is Used To Calculate Income-Based Loan Payments
If you have loan payments like income-based student loans, your lender will use your discretionary income to calculate your monthly payments. According to StudentAid.gov, “Discretionary income is the difference between your annual income and 150 percent of the poverty guideline for your family size and state of residence.”
In other words, you aren’t expected to make loan payments from any of the money from your total salary up to 150% of the poverty guidelines, as that portion is considered essential and non-discretionary. So, if you have a household size of two people, 150% of the poverty guideline comes to $18,310.
You may ask, “How does this relate to me purchasing property?”
We’re glad you asked! Since millions of Americans have student debt, some worry that it can affect their chance of buying property. We’re happy to say that it typically won’t! Like any loan, if you have good credit, a stable job, and choose the right mortgage program, you can find a property that meets your needs and budget.
The experts at Merchant of Homes have decades of experience buying and selling properties of all types. You can begin your home search with us, and we’ll guide you through the process.