By Scott Sheldon
Banks want you to believe getting a mortgage these days is easier — and that may be the case if your financial house is in order. However, the reality is that if you want a mortgage in today's lending environment, you need to prepare to prove your ability to repay and meet every threshold lenders have in place. These guidelines are on a checklist used by every underwriter in every mortgage company across the nation, with some subtle variances. And if you don't perfectly fit the lending criteria, you may face some challenges — meaning you could be asked to submit additional documentation, or letters of explanation, or you could even hurt your chances of getting approved.
Here are some common stumbling blocks that borrowers encounter in the mortgage process that you might just be able to overcome with the right help. If any of the following issues (or others not covered here) apply to you, make sure you discuss these details upfront with your loan professional so they can help your financial information conform to the underwriter's checklist.
1. A High Debt Ratio
It doesn't matter how great your credit score is, or even if you have millions of dollars to pay the mortgage off five times. When it comes to getting a mortgage, neither will save you from your high debt load. Sounds illogical, right? If your housing payments plus credit obligations exceed 45% of your monthly income, you're not getting a mortgage. That is, not without making some changes.
The solution: If you have debt preventing you from getting a mortgage, such as a car payment or even minimum payments on student loans or credit cards, it's time to sharpen your pencil. Can any of these accounts be paid off in full? Can these debts be consolidated for a lower payment? If yes, have a conversation with your loan officer and run these ratio numbers upfront with pragmatic figures. Most loan officers can look at your financial picture and advise you what debts need to be reworked to help move your mortgage process forward.
2. When the Solution to a Problem Creates a New Problem
This one can be the most frustrating for borrowers. Here's an example of this problem: Let's say your lender requests your end-of-year pay stubs, showing your total income for the year. But for whatever reason, this year shows less income than previous years. So the lender creates another condition based on this information, requiring a letter of explanation about declining income. In short, conditions brought on by a mortgage underwriting can create more conditions based on the documentation provided to support the original conditions.
The solution: Having a few resubmissions (about three) to the underwriter during your loan process is quite normal. But if it becomes too cumbersome, perhaps canceling the loan and starting over fresh with clearer direction can help fix a runaway lending laundry list.
3. Undocumented Funds
It's your money, but you may not be able to use it if you can't document it.
Even if you are self-employed, lenders will still want you to document your funds. Any deposits going into your bank account independent and separate from your income need to be documented, explained and sourced in order for those monies to be considered loan eligible — both for being counted toward your savings after sealing the deal, as well as for cash to close.
The solution: If possible, try to avoid depositing monies in your bank account that you are unprepared to document. Alternatives include using a different asset account without the deposit activity, or obtaining documentable gift funds.
4. Business Expense Write-Offs
Your lender will not ignore this issue.
The Internal Revenue Service allows a taxpayer who incurs expenses in the course of their employment to write off these expenses against their income rather than being reimbursed for these expenses via their employer using Form 2106. These expenses might be comprised of uniforms, educational items, dues, tools, things necessary to fulfill their job requirements, etc.
Accountants will suggest writing off these expenses as a means to offset a tax liability, which is perfectly acceptable for your tax situation … but it could hurt your mortgage chances. Here's how a lender views your tax write-offs: These monies come directly off your income otherwise used to qualify you for a mortgage payment, which reduces your chances of qualifying. Banks average two years of your write-offs, and subtract that from your income.
The solution: Just because the IRS allows the deduction does not always mean you should take it.
If you have taken these expenses in previous years, it will be counted against your income, unless there has been a change. If these expenses will continue in the future, your qualifying numbers might have to be adjusted accordingly to offset this income risk.
The key here is if you no longer need to take these write-offs moving forward, they won't be counted by your lender nor hurt your borrowing ability. Here's such an example: Let's say you are working full time as a police officer taking employee expenses. During that time you became permanently injured. The likelihood of your need to take these expenses moving forward becomes unlikely. Talk with your lender about how to proceed if your expense situation is expected to change in the future.
Overcoming Mortgage Obstacles
Even if you have a solid mortgage payment history and good credit, there still may be factors that change the dynamic of your loan, or how you'll be viewed on paper. Lending guidelines are meant to predict whether a borrower will default, and are meant to be one-size-fits-all, even if that isn't always how life works. Be prepared to tell your lender in great detail about any of the possible additional following items:
The origin of the gift monies you'll be using
- Deferred student loans
- A second job you've held for less than two years
- A brand-new job, or being brand-new to being self-employed
- IRS debt, spousal support or alimony of any kind
- Previous short sale, foreclosure or bankruptcy of any capacity in the past seven years
- Being self-employed less than two years
- Co-signed debt for which someone else makes the payment
Relatively speaking, procuring a loan is a breeze for those who don't have these particular issues and otherwise have a high credit score, strong equity, some savings and a low debt ratio. You can get an idea of how much house you can afford by using this calculator. You can also see what shape your credit is in by looking at your free credit report summary on Credit.com.
We're not likely to see lending requirements loosen up anytime soon, however. Until then, understand that when the lender asks for something that seems peculiar, redundant or unnecessary, this may help explain why.