Mortgage and Portfolio Loan Guide

Do I qualify for a home loan?

Here are all the answers to the question “Do I qualify for a home loan?” The answer to that question is really a four part question regarding you income, credit, assets, and property.

The real questions to be asking are:

  • Does my income qualify me for a mortgage?
  • Does my credit meet mortgage requirements?
  • Are my assets enough to cover the required down payment, closing costs, escrows, and reserves?
  • Does the property I am looking to buy meet lender guidelines and requirements?

In this post I will cover the answers to all of those questions and more. You’ll know exactly what you’re up against when seeking mortgage approval.

Does my income qualify for a home loan?

When applying for a mortgage you have to think like an underwriter.

Regarding income, here is how an underwriter thinks: “does this potential borrower show consistency and stability with their income and employment history?”

In the mortgage world consistency is best demonstrated by providing proof of income for the most recent two year history. If your income is the same or more this year than it was last year, and the year before – that means your income is consistently increasing.

If your income is less last year than it was the year before, that means your income is “declining”. Declining income demonstrates instability, and could potentially cause an issue with approval unless there is a legitimate reason for the declining income.

If showing declining income it helps to show that you’re back on your feet by showing your year to date income is back on track to earn what you did in previous years.

If you are W-2 employee of a company your income will be based on the gross amount on your pay stub. If you are a salary employee it’s very simple.do I qualify for a home loan income

If you are an hourly employee your income is: your wage X average hours per week X 52 / 12.

If you recently received a raise, your income will be based on your most recent raise.

For incentive pay like commission, bonus, overtime – you will need a 2 year history of receiving that income in order to be able to demonstrate consistency/stability.

What if you are self-employed? See full article on how your income is considered.

The way the lender decides if you’re eligible for a loan is by calculating your income and measuring that against your monthly liabilities (including all items shown on credit, alimony/child support, and all real estate obligations). The underwriter divides your debt into your income (or debt to income ratio).

So if your debt is 4,000/month and your income is 8,000/month, you have a 50% debt-to-income (DTI) ratio.

Most lenders to not like to see debt-to-income ratio above 45%, but in some cases 50% DTI is accepted with strong compensating factors (high asset reserves, low loan to value ratio, etc.).

Does my credit meet mortgage requirements?

Credit = credibility of previous payment history.

You have 1 score from each bureau:

  • Transunion
  • Equifax
  • Experian

For a standard conventional loan, 620 middle credit score is needed. [For other loan types, there are cases where you can go as low as 500 credit score. Just ask.

So if you have scores of 650, 675, 690 – the 675 score is what is used.

Important Note: The scores that the credit bureaus report to mortgage lenders are different than what is reported to consumers who pull consumer reports. The scores that lenders see are almost always lower than what you might pull on CreditKarma.com.

CreditKarma.com is still a great site, and gives you something to start with when trying to get an idea of where you stand.

Aside from actual credit score, here are the things lenders look for on your credit report:

  • On time payment history (or lack thereof – aka late payments)
  • Length of credit established
  • Derogatory marks like collections, charge-offs, judgments, tax liens
  • Major credit events like bankruptcy, foreclosure, short sale

Payment History

It’s crucial to be able to show minimal late payments in the most recent 24 months, especially on housing payment history. Most traditional loans only allow one 30 day late payment in the last 12 months.

But there are alternative loan options for unique credit circumstances.

Length of Established Credit

In many cases there will be a need to show at least 12 months of established credit. However, there are exceptions.

If you have 10-20% down payment, >2 years on the job, and can prove rent history, it may be possible to get approved with less than 12 months credit history.

No Credit Score | No credit Historydo i qualify for a home loan credit

Some people just like to pay cash. Plain and simple. I get it.

For those who have no credit established, and no credit score, you may still qualify for a mortgage by using non-traditional credit approach.

A non-traditional credit report would consist of 3 accounts you pay toward that do NOT show on your traditional credit report.

Examples of non-traditional credit:

  • Rental payments
  • Utility payments (gas, electric, water, landline, home phone, cable)
  • Netflix/HULU
  • Child care
  • School tuition
  • Proof of 12 months savings
  • Gym membership
  • And more

If you have a legitimate (and consistent) 12 month payment history on an account there is a chance it may be considered by the lender in the overall decision to lend.

Derogatory Marks

For minor collections, there are cases where they do not need to be paid off prior to closing on your home loan. Medical collections are given some flexibility as well.

But if you have more than $1,000 in outstanding collections, they will most likely need to be paid prior to closing.

Judgments and tax liens must be paid prior to closing. The lender does not want to have to deal with those obligations potentially becoming a lien on the property/collateral.

These derogatory marks do not necessarily need to be removed from the credit report. Most of the time, the lender just wants legitimate proof or paper trail to confirm the obligation has been paid/satisfied/settled.

Disputed Accounts

When you dispute an account on your credit report because you disagree with the way it is being reported, the credit bureaus immediately disregard that account when calculating your scores.

The result of disputing an account is the credit scores go up. This is because the negative account that is being disputed is not being included in the overall scoring calculation.

For that reason, lenders will typically not allow a loan to proceed until the dispute has been removed, and new credit has been pulled. The logic is: if there is a disputed account, the credit scores are artificially high.

Major Credit Events

On most mortgage loans there is a waiting period between when a person has gone through a major credit event, and when they are eligible for new home financing. Below is a basic summary of what to typically expect as far as waiting periods are concerned. [there are portfolio loans where no waiting period is required]

  • Bankruptcy – Chapter 7
    • FHA – 2 year waiting period
    • Conventional – 4 year waiting period
    • VA – 2 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment if home was included in foreclosure.
  • Bankruptcy – Chapter 13
    • FHA – Must have 12 months on time payments and permission from trustee to enter new mortgage. Must be manually underwritten if less than 2 years.
    • Conventional – 2 year waiting period
    • VA – 1 year waiting period
    • USDA – 1 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment
  • Foreclosure
    • FHA – 3 year waiting period
    • Conventional – 7 year waiting period (Unless property that foreclosed was included in bankruptcy. If home was included in BK, waiting period is based on bankruptcy discharge date)
    • VA – 3 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment
  • Short Sale or Deed-in-lieu
    • FHA – 3 year waiting period
    • Conventional – 4 year waiting period
    • VA – 3 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment

Keep in mind, guidelines change constantly. It would appear a portfolio loan is a good option if you’re back on your feet and don’t yet meet traditional waiting period requirements. More on portfolio loans here.

Do my assets meet home loan requirements?

When evaluating assets the underwriter is reviewing available funds for:

  • Down payment – The amount that you’re coming out of pocket to secure the home.
  • Closing costs – The fees associated with acquiring the home (appraisal, origination, title, closing, recording, etc.)
  • Escrows/prepaids (for taxes and insurance) – The amount set aside to account for taxes and insurance on the property
  • Reserves – The amount of left over available funds

The funds used to qualify must be “seasoned” in your account for 60 days to be eligible funds. Any large deposits that are not seasoned must be explained and sourced. Cash deposits are unacceptable because the source cannot be verified/confirmed.

If you have a property that you are simultaneously selling during the process of buying the new home, the proceeds of the sale of that previous home do not need to be seasoned. You will need to provide proof of sale of the home (purchase and sale agreement) as well as the closing statement prior to closing on the new home.

Reservesdo i qualify for a home loan assets

The logic of reviewing reserves is: if the borrower should unexpectedly fall on hard times, there is enough set aside to cover the mortgage payment for X number of months.

Showing adequate reserves helps strengthen the overall file.

Reserves can be from your traditional bank account, brokerage account, retirement account, etc. You cannot use a non-borrower’s account to show reserves.

Gift Funds 

For most loan types gift funds from family are acceptable. There are scenarios where a non-family member can gift the funds, but every lender is going to have a different interpretation of who is acceptable. For best results, just ask.

Non-Liquid Assets

Cars, RV’s, heavy equipment, beanie babies… are not liquid assets.

Vehicles and other items that can be easily valued, can be considered if sold and properly documented.

If you sell a car in order to qualify for a mortgage be sure to have kelly blue book value on hand, bill of sale, and copy of the check you received when you sold the vehicle. Having a full paper trail helps tremendously.

 

Does the property being financed meet lending guidelines?

There are an infinite number of reasons the property might not meet lender requirements.

I am going to cover some of the most common reasons the property can be the cause of denial with the lender.

Non-Warrantable Condo

When buying a condominium, not only does the borrower’s finances get evaluated, but the homeowners association is also closely reviewed.

The lender will order a “condo questionnaire” in order to evaluate the health of the association.

They’ll look for things like: completion status, investor concentration, pending litigation, and so much more.

More on non-warrantable condos here.

Repairs Neededdo i qualify for a home loan house

If the property is in disrepair, the lender will require completion of repairs prior to closing in most cases. Repairs needed will be determined based on appraiser’s comments in the appraisal report.

The repairs need to be completed by the seller, and a final inspection will be needed prior to closing to confirm completion.

If the repairs are fairly minor, there are many landers that will allow a “repair escrow”.

A repair escrow is where funds are set aside at closing to cover the cost of the repairs needed. Then the loan closes, and repairs are done after closing. A final inspection is completed when ready.

Typically this only allowed when repairs are no more than $5,000. With a repair escrow, 150% of the estimated repair costs are collected in case of unexpected cost overages.

Example: if the repairs needed are estimated to be $3,000, the actual amount collected for the repair escrow will be $4,500.

If the excess funds aren’t used, the difference will be refunded to the borrower or applied toward the principal balance.

For properties in need of major repair. There are renovation mortgages available on both FHA and conventional.

Unique Property Type

One of the most crucial parts of the appraisal report has to do with the appraiser being able to find recently sold homes that are comparable in size/condition/use that have sold within a reasonable distance.

If there are unique features to the property, the appraiser may have a challenge that cannot be resolved due to market conditions.

Even if there are comparables, some lenders simply do not allow unique property types.

Unique features that could be a challenge:

  • Berm homes
  • Properties that are not suitable for year round occupancy regardless of location
  • Agricultural zoned property
  • Condo hotels
  • More than 20 acres
  • Hobby farms
  • Leaseholds
  • Rustic log cabins
  • Working farms, ranches, or orchards

For unique property type financing, a portfolio loan may be a solution.

In Summary

There are four major pieces of the scenario to consider when asking the question “do I qualify for a home loan”?

Those pieces are: income, credit, assets, and property.

If any of your questions were left unanswered I strongly encourage you to reach out to me below and ask.

If I cannot help, I should be able to point you in the right direction at the very least.

self employed home loans

 

 

Tax Returns and Mortgage Approval

What impact do your tax returns have on buying a house?

It is no secret that the income piece of the mortgage approval process is a major factor. Your ability to repay the mortgage is arguably to MOST important factor that is considered when applying for a home loan.

But how is that income calculated?

What if you are self-employed?

What if you have multiple sources of income?

In this post I am going to cover some of the most important things to consider when it comes to buying a house, and how your income plays such a major role.

How is my income calculated on my mortgage application?

There are many different forms of income, I am going to cover the most common that I run into, and give you general basics on how that income is considered in connection with mortgage appproval.

No matter the scenario, an underwriter is going to want to see consistency, and stability. Proving your ability to repay is the name of the game. If you can demonstrate consistency over most recent 24 months, and stability (same line of work), you are on the right track.

Salary employee (W-2)tax returns mortgage approval

Your annual gross salary divided by 12.

Example: 120,000 annual salary / 12 = 10,000 monthly income

For salaried employees it’s pretty straight forward as long as you have been in the same industry for 2 years. If you used to be an electrical engineer at 100K/year, but now you teach physical education at the elementary school, the underwriter may ask questions regarding stability, and may need to you to be on the job for 6-12 months before reconsidering.

It has to make sense.

Hourly Employee

Base wage is calculated by average number of hours reflected on most recent 30 days pay stubs.

Example: $15/hour X 40 hours per week X 52 / 12 = 2,600/month

If number of hours fluctuate, you’ll need a written verification of income ordered by your lender to be filled out by your boss or human resources department in order to get a better feel for your average number of hours worked

Commission – Bonus – Incentive – Overtime Income

Any fluctuating income is going to require a 24 month history in order to calculate consistency. If the incentive income is declining the underwriter will likely only use the most recent 12 months or year to date amount for the commission/bonus/overtime income in order to be safe.

1099 – Private Contractor Income

When you are a 1099 employee, the company paying you does not deduct things like federal/state income tax from your gross income. For that reason, what you claim on your federal tax returns as your actual income is up in the air until you actually file your tax returns.

There may be deductions that you’re eligible for that will reduce the amount of income you claim on your tax returns.

That reduction in earnings claimed will have an impact on your debt to income ratio when applying for a mortgage.

There is almost always a lack of consistency when considering 1099 income because of the nature of those types of earnings.

Again, in this case the underwriter is going to want to see proof of 24 months of receiving that type of income in order to determine what you actually claim as income after tax write-offs.

Self-Employed Income – Business Owners

Self-employed income is evaluated similar to the way 1099 employee income is reviewed.bank statement loan program

Always best to be able to show two full years of tax returns so that the underwriter can reasonably calculate your income, and get a feel for the health of the business.

For simplicity purposes: your income is the number that is shown on the Adjusted Gross Income line on page 1 of the 1040’s.

Yes there are some deductions that can be added back into the bottom line, but for starters – just find the adjusted gross income to understand basic ballpark.

In addition it is common to have to require a year to date profit and loss statement. This is used to evaluate how the company is doing in comparison to the previous year. It is NOT used to increase your income if you happen to be having a very strong year.

If your business is anything OTHER than LLC or sole proprietorship, you’ll also need to provide two years of business/corporate tax returns along with K-1 if applicable.

Multiple Sources of Income

When seeking approval with 2 jobs, you need to be on job jobs for two full years. Otherwise there is no way to determine the likelihood of you being able to maintain that type of demanding work load.

If the second source of income is NOT from an employer, requirements will vary depending on source of income (disability, social security, pension, rental income, etc.).

Keep in mind – the name of the game is the ability to prove consistency and stability.

What if I filed an extension on my tax returns?

Many business owners take advantage of the opportunity to NOT file their taxes in April like the rest of the country, and instead file an “extension”. The extension allows them to not officially file their taxes until October.

This presents challenges when applying for a mortgage for 2 major reasons:

  1. The income for the year that the extension is filed for is basically disregarded by the underwriter. They will only consider it to confirm the income is in line with previous years. Cannot use it to increase the averages.
  2. When the extension is filed, there is an estimated amount owed for that year’s taxes. When an underwriter sees that estimated amount owed on the extension, they will typically require that amount to be paid prior to closing.

This goes for personal and business tax returns alike.

What if I show low income on my tax returns and I am a business owner?

It is very common for business owners to take full advantage of the legal tax write-offs that are available to them.

The problem with using those write-offs is they often offset the bottom line income claimed significantly.

For business owners in this scenario, who actually have strong income that they can prove – a bank statement loan may be the best solution.

A bank statement loan is a type of portfolio loan that allows business owners to qualify based on the income shown on their bank statements over a 12-24 month period.

This gives the lender the opportunity to evaluate a self-employed borrower’s income with more of a common sense approach.

On a bank statement loan you must be self-employed with the same business for at least two years.

[more on Bank Statement Loans and Portfolio Loans here]

What if I have been self-employed for less than two years?

If you have have been self-employed less than 2 years you may need to look into getting a portfolio loan.

It’s an underwriter call, but without having 2 full years tax returns as self-employed most underwriters find it difficult to agree that stability has been established.

With a portfolio loan you may be able to get around that requirement if:

  • You have been self-employed for at least 1 full year on tax returns
  • You have at least two years of documented previous successful employment in the line of work in which you are self-employed in, or in a related occupation or
  • You have one year of employment and formal education or training in the same line of work

If you’re in business less than one year, that income is not going to be considered as effective.

What if I want to only use my most recent year tax return to qualify?

When having a strong rebounding year after a slow year, it is often asked if a business owner can ONLY use the most recent year tax return to qualify. The logic is to be able to exclude the need to average the low year with the most recent strong year.

There is a conventional product that will allow you to use only the most recent year’s tax returns to qualify.

To be eligible for this product, you must have been in business for at least 5 years, and meet all other credit and asset guidelines. Contact me for questions on this.

In Summary

Tax returns play an extremely important role in the home buying process.

When you file, how you file, and how much income you claim will determine what type of loan will suit you best.

Get your questions answered.

 

I encourage you to reach out.

We can’t help everyone, but we do make every effort to take a common sense approach to get our borrowers approved if it makes sense.

 

 

 

self employed home loans

Self-Employed Less Than Two Years Mortgage Solution

Update: 3/6/17

No conforming product currently allows for 1 year tax returns as self-employed if self-employed less than 2 years. On a vary rare basis, some lenders will allow for less than 2 years self-employment. 

It is unclear currently on if 2 year tax returns averaged will be acceptable. 

I will keep this updated as new information comes in. The updated guideline is below. -Adam Lesner

For self-employed Borrowers, the number of years of required tax returns will be based on the number of years the business has been in existence:

  • For businesses operating for five or more (5+) years, one (1) year of business and personal returns will be required.
  • For businesses operating for less than five (5) years, two (2) years of business and personal returns will be required.

(the solution may be a portfolio loan if you have extensive experience in same line of work prior to going self-employed and have at least 1 full year tax return as self-employed)

Is it possible to buy a home if you are a “private contractor” or have been self-employed less than 2 years?

The answer is yes it’s possible, but each situation is unique.

Before we dive into how it’s possible, let’s get on the same page of what the root issue is. Being self-employed less than two years makes it difficult for the lender to make a determination of what your actual income is because there is limited history. Since there is limited history, it’s just as difficult to determine the likelihood of that income to continue in the future.

“Okay, but Adam, I can show you my bank statements with deposits of $10,000/week.”

Right, I get it. You make good money. You have cash money sitting in your bank as a result of your business being profitable. The problem: the lender can’t see how much you had to spend in order to get that kind of return unless you have a profit and loss statement prepared, and show proof of how you’re reporting those expenses to Uncle Sam.  So many, maybe even 80% of the business owners that provide tax returns for me to look at, claim substantial write-offs which offset their income in a way that nearly puts them at a break-even point. The solution: get a bank statement mortgage. There are a few different options when it comes to using bank statements as proof of income. Ask me if I can help with your unique situation by using you bank statements as proof of income.

The good news…

person-110303_1280is that there are lenders out there that will take a look at self-employed borrowers, or even 1099 private contractors from a common sense standpoint. Standard loans backed by Fannie Mae, Freddie Mac, FHA, etc. are not going to be the way to go if you’re self-employed less than two years. The guidelines are strict, and the opportunity to be looked at from a common sense standpoint are extremely limited. Your best bet is to find a lender that offers portfolio financing. This is where they lend their own money, and keep your loan in-house. Keeping your loan in-house means it will not be sold on the secondary market, which means it will not have to meet the strict guidelines of conventional and FHA mortgages. You’ll find portfolio lending with the smaller lenders or credit unions in your local areas. They are the companies that are organically grown within the community, and they tend to have more of an attachment to the area.

2 examples that might make sense to get approved for home financing for less than two years self-employed borrowers:

  1. You have been an IT professional for 5 years. Last year you went from being a W-2 employee to a 1099 employee (private contractor). You’re still working for the same company, but now you are on an annual contract instead of an annual salary. You provide a profit and loss statement showing your income is consistent with how you claimed your tax returns last year. Bam! It makes sense right? Well, most lenders won’t talk to you unless you have 2 years tax returns.
  2. You have been in business for yourself for 5 years running a printer supply store. Last year you had to change the name of your company because of a shady partner that you had to break ties with. You still operate on the same premises. The only thing that changed is the name of your company. Some loan officers will say “Yeah, let’s do this,” just to find out a week before closing that their underwriter isn’t going to approve the loan because there is not a two year history of that business. But, come on, it’s common sense. You’re only going to be looked at from a common sense standpoint in a case like this if you’re working with a lender that offers portfolio loans.

An example that probably won’t fly:

  • You have been a plumber for 10 years. You decide to quit your job and open a pizza parlor. You decide 6 months into it that you want to buy your dream home on the lake. Sorry, it’s going to be impossible to make a determination of what your income is in that short period of time.

How do tax returns impact your mortgage approval? Here is my latest post on that.

 

 



When seeking a portfolio loan, keep these things in mind…check-37583_1280

These are loans that are funded in-house with your particular lender, taking risks the vast majority of lenders aren’t willing to take. You may be required to put 10% down or more. You may only be able to do this type of loan on a primary residence. Your rate might not be the same as what conventional rates are. You may get a chance to be told “Yup, you’re approved”, when everyone else is saying “no”!

I invite you to reach out to me.

portfolio mortgage lendersGet your questions answered. You will not be talking with an intern, or someone who just got their mortgage license. You’ll be talking with me directly.

We can’t help everyone, but we do make every effort to take a common sense approach to get self-employed borrowers approved if it makes sense.

pre approved home loan

 

Zero Down Mortgage – USDA Home Loans

RD loan

Zero Down Mortgage

Did you know that even if you’re not a veteran you can buy a home with a zero down mortgage in many areas? And it’s not too good to be true. There are, however, some restrictions regarding location and income.

The United States Department of Agriculture (USDA) Rural Development guaranteed loan usdalogoprogram is a government loan designed to help low-moderate income earners purchase a home in “rural” areas. However, you may be surprised to see what the government considers to be rural and low-moderate income.

Income

The income restrictions will vary across the country and even across each state. Here is an example for my local market in Livingston County, Michigan. For a guaranteed RD loan the annual household income must be at $93,450 or below. Even if the spouse is not a borrower on the loan, their income will be used as a factor in the household income. USDA looks at the whole picture, not just the applicant. You can use this tool to help you get an idea if your family qualifies for an RD loan in regards to income. Remember when using that tool, you’re looking for qualifying on the guaranteed loan, which will maximize your buying power from in income standpoint.

Location

Many folks are shocked when they take a look to see that their neighborhood is in an area that is considered to be a “rural area” which allows them to get a zero down mortgage. Just outside the metro Detroit area and not far from many major cities Rural Development financing is available. Although the mapping tool on the USDA website is not 100% accurate, you can use this tool to give you an idea of what areas are eligible. You may be pleasantly surprised to find that you don’t have be living “out in the sticks” to be eligible for Rural Development financing.

What is also exciting about RD loans is that you can buy a condo with this program as long as it’s within the eligible geographic limits. Crazy right? Some people call RD loans “farm loans” and you can buy a condo with them. How awesome is that?!

What to Expect

  • Make sure you have your ducks in a row in respect to credit. You don’t need to have perfect credit, but it needs to be reasonable.
  • The process may take a little bit longer than other loans because it needs to get final approval by USDA after the lender approves it. However, right now in my particular market in Michigan, the RD turn time is 2-3 days. So not a significant delay currently.
  • Mortgage insurance is significantly less than FHA on a monthly basis, about 1/3 of what it costs on FHA.

There are so many expenses to consider when buying a home. So if you have an opportunity to buy with a zero down mortgage, and you qualify, why not take advantage of that opportunity?

Watch Video:

How Much Home Can You Afford?

What Mortgage Can I Afford?

So let me get this straight; you make $300,000 annually, but you show Uncle Sam that your income is below the poverty line? Sure, no problem, let’s get you that 2nd home on the beach!

Yes that example may be a little extreme. However, this is something that constantly comes up with potential homeowners. In Part 3 of the “keeping your home loan process simple” series; the income piece of the mortgage puzzle is laid out in plain text.

Here is the short of it: Show a recent 2 year consistent income on your tax returns, and prove you’re still receiving that compensation. There you go, no need to keep reading, unless of course your circumstances aren’t quite that simple.

The truth is that even if you’re a salaried employee with a fortune 500 company; in some cases it can still be a challenge to prove your income, and how you’re compensated. This should help you answer the question “what mortgage can I afford”.

Income basics

If you’re employed you can be sure you’ll be asked for the following: Most recent 2 years federal tax returns (all pages), mostBrighton, MI

recent 2 years W-2s (1099’s if applicable), and most recent 30 days worth of pay stubs. You may not always be asked for your tax returns, but it’s best to provide them up front in order to reduce any last minute surprises.

  • Pay stubs should show: the same employers name or entity as the W-2, your name, taxes withheld, and pay rate.
  • If you are using overtime, bonus, or special incentive pay to qualify your employer will need to break down that pay separate from your salary (or hourly) pay. They will also need to confirm in writing how much of that type of income you have received in the last 2 years, and how much you’ve received so far in the present year. This helps the lender to gain an understanding of how consistent, and stable that income has been for you historically.
  • For commission income you’ll need to provide a 2 year history as well. Additionally, your tax returns will get examined in more detail to confirm you didn’t have any employment writeoffs which may offset your income. This can be more common with commission folks.
  • Your lender will order your tax transcripts from the IRS. The purpose is to verify that the IRS shows the same figures as the tax returns you provided.

Self-employed

If you have ownership interest in a company you’ll need to provide at least 2 years most recent federal tax returns (all pages). If you file business tax returns be ready to provide those as well. Your accountant will need to provide a P&L (profit and loss statement) if you happen to be applying for a home loan in the month of April or later in the year. Your P&L states how the company is performing for the year so far. Your P&L gives the lender a picture of how your income (or loss) looks in comparison to previous years. Again, your lender is looking for stability and consistency (or lack there of).

Debt-to-income ratio

michigan mortgage lenderYour monthly liabilities divided by your monthly verifiable income equals your debt-to-income ratio. The liabilities that are considered in this figure are the payments shown on your credit report, property insurance/taxes, alimony/child support owed, and any other legally binding payment. It’s best to do what you can to put yourself in a position to be at or below 43% debt-to-income ratio.Example… Mr. Homeowner has a car loan and credit card; combined payments are $250/month. His mortgage payment including taxes, insurance, and mortgage insurance is $1,100/month. Mr. Homeowner is an engineer with a $60,000/year salary. Mr. Homeowner’s debt-to-income ratio looks like this: 1,350 / 5,000 = .27, or 27%.

Beyond basics

Rental property – 2 years most recent federal tax returns, proof of property taxes and homeowners insurance. Your credit report will show your mortgage payment. If you have your taxes and insurance escrowed (included with the monthly payment) provide your mortgage statement.

Investment income and capital gains – 2 years most recent federal tax returns. Your lender will evaluate consistency, and likelihood of continuance.

Alimony/Child support – You’re probably shocked, but some ex-spouses fail to pay court ordered alimony or child support. For that reason you’ll need to show proof you have been receiving consistent payments for at least 6 months. Also have the full divorce decree ready, and any other updated court documents addressing any changes.

Social security retirement – Current year award letter from social security which states the amount of monthly compensation you’re entitled to. Also a good idea to provide 2 months bank statements showing the deposits received from social security.

Social security permanent disability – If social security has deemed you to be permanently disabled you will have an award letter confirming such compensation. You may also be required to provide a recent letter from a physician confirmingmichigan mortgage lender the state of your condition and the likelihood of the condition to change.

Short term disability – Short term disability will be most likely ineligible to use to qualify for a mortgage because of the uncertainty of continuance.

Pension/retirement – Some pension plans will provide a pay stub and W-2; similar to what you received when you were working. If so, that should be simple enough to verify. If you’re receiving income from an annuity, IRA, or 401K you’ll need to prove it. It would be a good idea to have your most recent quarterly investment statement handy; along with 2 years tax returns. The investment statement you provide will help track your draw (income) history, but also give an indication as to how long that income is likely to continue. The remaining balance should be at least enough to sustain the same draws for 3 years.

VA disability – After being discharged from the armed forces; a veteran may be entitled to disability compensation for injuries sustained while in service. Similar to social security disability; you’ll have an award letter issued to you stating your compensation benefits. The VA has gotten much better in the last few years on requests for a new letter or verification of the status. More on VA and veteran benefits coming soon.

Unemployment – Typically, if unemployment is reported on your tax returns you’ll need to explain in writing why you were receiving unemployment. If you’re in a seasonal line of work like landscaping, and you cannot work in the winter, that would be considered reasonable reason to consider using unemployment income to qualify. If you lost your job and couldn’t find employment for a year; the unemployment compensation you received at that time wouldn’t be considered as stable.

Part time – You must demonstrate a 2 year history receiving consistent hours and pay.

Higher education – You can use the time spent while in college or trade school as part of your 2 year history. The time in higher learning will be considered if you can provide transcripts or a diploma. If school is part of your 2 year history; the only income considered for your new employment will be salary/hourly income in a full time position.

Under the table – Waiters and bartenders tend to not claim all tips received on their tax returns. Any job that you have that is paid under the table will not be considered.

Letters of explanation – When your situation is unique, and you have an opportunity to tell the story, take that opportunity seriously. Be detailed in why it took 4 months to find a job, or why your relocation to another state will not have a negative impact on your income. You’re painting a picture for your lender. You’re helping them put together the puzzle.

Verification of employment – Your lender will reach out to your employer to make sure you actually work there. While your loan is in process, and right before closing your loan your employment status will be verified. This is also an opportunity to have your commission, bonus, or overtime income verified. Things can get sticky if your employer refuses to break down your salary income from other compensation in detail.

What’s the name of the game? If you said consistency coupled with stability; you’d be dead on. Of course the ability to provide relevant documentation to support everything puts the icing on the cake.

A few tips to end with for now…

Your tax returns show unreimbursed business expenses on you schedule A. Take a look at those before you turn your tax returns in to your lender even if you’re not a business owner. A mechanic at a dealership could claim unreimbursed expenses for uniform costs throughout the year. Often times unreimbursed business expenses can cause a last minute issue if they are initially overlooked. Claiming that type of write-off could have an impact on your debt-to-income ratio.

If you have taken out a 401K loan against your employer’s retirement plan there will be an item on your paystub that with address that. Since it’s a loan you’re paying back, that liability would have to be considered in your debt-to-income ratio. If your total vested balance in the 401K exceeds the amount of the loan you have against it; you may be able to exclude that liability from your debt ratio. Have your most recent quarterly statement handy to show your balance.

Having the last pay stub (December 31st pay stub) for the previous two years will often be an easy way to verify how much bonus, commission, and overtime income you received in the previous years.

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