The biggest docmentation challenge facing mortgage applicants in this brave new world of EXTREME DOCUMENTATION is (choose one):
A. Having enough assets
B. Having enough income
C. Having enough downpayment or equity in property
D. Having a mortgage broker smart enough to put together a puzzle with 1000 small pieces and no picture on the cover of the box
Okay, I threw in that last one just to rant about the current state of affairs at my desk.
The answer is "B", having enough income. Just because you made the money, paid tax on the money, took it to the bank and cashed it, then bought lunch with it, DOES NOT MEAN IT WILL COUNT AS INCOME ON YOUR CREDIT APPLICATION.
Nope. The truth is banks are darn picky about what income they will accept as proof you have the ability to pay back the loan. Would it surprise you to know that when stated income was alive and well (and being used properly) the intent was to give good credit borrowers with plenty of income the ability to buy houses?
This is because many forms of income are simply not allowable to banks. While most people automatically think of the waiter earning tips, or the business owner who "lives" out of his business (showing very little income on his tax return), there are other lesser known situations that prevent income from being considered as part of qualifying for a mortgage.
Let's just say the mortgage industry is still attempting to figure out what to do with perfectly good borrowers who have slid between the cracks, and now cannot qualify for a loan.
Here are some ACTUAL examples, straight from my desk, of income that the lender rejected as NOT ACCEPTABLE:
THE SELF EMPLOYMENT TRAP
Borrower was self employed for last 12 months, had a W2 job for 12 months prior. (Self employed income must be steady for 2 years)
THE RENT A ROOM TRAP
Borrower had rental income of $3,000 a month from renting out the bedrooms in his large San Francisco home, also claiming it on his tax return (can't count income from "boarders" )
THE NEW JOB WITH BONUS TRAP
Borrower has new job in California with major corporation and 6 figure income. Bonus for this job is paid once a year and has averaged 40% of the base salary for the 10 previous years in this position (Borrower must have earned bonus in his previous job for new bonus to count...bank doesn't care about the bonus potential of the position)
THE INVESTOR TRAP
Borrower has purchased 7 income properties that are breaking even. Bank automatically imposes a 25% "vacancy factor" which means if 7 properties bring in $14,000, borrower is immediately $3500 negative (on paper). The $3500 is counted against his income from his regular job rendering him unable to qualify.
WHY WE SHOULDN'T THROW OUT THE BABY WITH THE BATHWATER
In another world, in another life, we solved these situations with STATED INCOME LOANS. I understand the world would like to call these liar loans, and think every person who got one inflated their income. But here's a newsflash: every example above also had attached to it a borrower who is over 40 years old, with an over 700 credit score, and the chances of them NOT making a mortgage payment are just about zilch.
Here's another newsflash: I often stated LESS income than the borrower actually had coming in on my STATED INCOME LOANS because I only stated the minimum to qualify, not the ACTUAL earnings.
I say there is a legitimate place in this world for stated income loans to highly qualified buyers. Perhaps the lending world should stop lumping these borrowers with the drug store clerk that claimed to be making $10,000 a month and had a 598 credit score.
Bring back stated income loans.
Written by Janet Guilbault, California Mortgage Expert Based Out of the San Francisco Bay Area.
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