Fast track to mortgage approval
Fast track to mortgage approval
Editor's note: This is the second column in a three-part series.
Borrowers without the income required to qualify for the mortgage they need have many possible options. "Income adequacy" is governed by general guidelines that can be adjusted to meet individual circumstances. It is "softer" than the down payment requirement, discussed last week.
Maximum debt-to-income ratio
The measure of income adequacy most often used is the sum of the monthly payment on the new mortgage, plus property taxes, homeowners insurance and other debt payments, divided by income. The maximum ranges from 40 percent to 43 percent, but underwriters have discretion to accept higher requirements if they believe that circumstances justify them.
Debt payments are those that extend beyond the next six months and are not deferred for a year or longer. This includes HELOCs and other revolving credits, credit card debt that you don't pay off at month-end, student loans, and alimony and child support payments.
Repairing inadequate income
The obvious way to repair inadequate income is to earn more, but there are also ways to make your existing income count for more. One way is to convince the underwriter that you can safely devote a larger proportion of your income to housing expense than is typical for someone in your income bracket. The best (perhaps the only) way to do that is to document that you have done it in the past -- either as a past homeowner or as a renter.
Another repair could be to induce the underwriter to count income that would ordinarily be disregarded because of a presumption that it won't continue. You rebut that presumption by presenting evidence to the contrary. Such evidence could be historical data showing that the income has in fact been generated over a considerable period. Or the evidence could be forward-looking testimony by someone in position to have knowledge of your prospects, such as your employer. Here are some examples:
Borrowers qualifying with business income are subject to much more complicated rules that require a separate column.
Using the income of others near and dear
Co-signers: A co-signer assumes responsibility for payment of a debt in the event that the borrower doesn't pay. However, co-signing on a mortgage is severely restricted, with the result that it is not much used.
Non-occupant co-borrowers: FHA allows a borrower to include the income of non-occupant co-borrowers who are close family members or can demonstrate a long-standing relationship with the primary borrower. That means that parents who want to help their children become homeowners can do it by becoming co-owners and co-borrowers. The loan amount must fall within FHA limits for the specific area, and the parents must meet the same underwriting requirements as the primary borrower.
Participating investors: Non-occupant co-borrowers are not allowed on conventional loans, but willing parents can become participating investors in a purchase classified as an investment rather than for occupancy. For the parents, being participating investors is the same as being non-occupant co-borrowers, since in both cases they are part owners, liable for the debt, and they must meet the same underwriting requirements as the primary borrower.
In most cases, mortgages on investment properties require 20 percent down, and are priced 0.75 percent to 1 percent higher than comparable loans to permanent occupants.
Reducing debt payments
If the debt-to-income ratio is swollen by large monthly debt payments, there may be ways to reduce the payments. Borrowers who have a 401(k) can borrow against it and use the proceeds to pay down other debt. Loans from 401(k) are not included in the debt ratio. Reducing debt payments by extending maturities is an option that should be exercised with care because longer-maturity debts usually have higher interest rates.
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