In the first part of this series, we covered the problems you might encounter because of the public record, and in the second, we discussed fixing issues with your credit file — part three is all about the “other” stuff that didn’t quite fit into the first two. There are countless miscellaneous issues you might encounter, but I’m going to limit this to just the most common. If you find something new, don’t hesitate to post about it in the comments section.
Now, when it comes to getting a mortgage, you know that your lender looks at almost everything to do with your life, your income, your work and your education to determine if they think you’ll be capable of repaying a 15 or 30 year note. The longer the note, the tighter the scrutiny, as would be expected of anyone looking to make that sort of commitment. No one wants to rush a 30 year arrangement, least of all your bank.
So, like it or hate it, the mortgage process is necessarily complicated and lengthy, to ensure that everyone is getting dealt a fair hand. Keeping mortgage defaults low helps keep the real estate market in check and the prices of mortgages reasonable — it’s all a balancing act at the end of the day.
That’s why even after public record and credit stuff has checked out, there can still be problems. Banks always need more data and they need it now. But you don’t have to go into your mortgage application unprepared.
You may have great credit and you may be free of bankruptcies and judgements, but you still might not be an ideal mortgage candidate. That’s ok, we can fix that. Here are four more very common problems with mortgage applications that you may encounter:
1. Prior Foreclosure
If you bought a house in the past and weren’t able to make the payments, chances are good it ended up in foreclosure. Although this sounds like a terrifying scenario, the Great Recession made it a disappointingly commonplace situation for banks across the country. They know just how many houses ended up going that direction — and they don’t want to disqualify someone who is an otherwise great mortgage candidate because of a massive economic disaster.
Time is your best friend when it comes to mellowing a foreclosure. However, if you’re in a rush to get back into a home of your own, certain programs may be able to help you achieve homeownership again before the typical seven or eight year waiting period. Both FHA and conventional loans are available to borrowers that are at least three years post-foreclosure, provided they are good credit candidates otherwise.
FHA loan wait times can be further accelerated if you can demonstrate to your lender that the foreclosure was due to circumstances beyond your control. This might include things like divorce, job loss or a serious illness in the family, but it’ll be up to the underwriter and loan originator to determine if your situation qualifies.
Another option for those of you who have been through foreclosure and are looking to get back on your feet is owner financing. I know, we normally encourage bank loans because they’re typically both easier to secure and more consistent in their execution, but if your credit is good, you have a hefty down payment and all you need is a little more time to get out from under your foreclosure, owner finance can help bridge the gap.
Use caution because you’ll not be able to qualify for first time home buyer perks if you’re owner financing, but if you can find a reputable owner looking to carry their own note, you’ll get back into a house right away. I’ll put together a piece on owner financing in the near future to help you better understand that — there’s not nearly enough room in this piece to deal with it here.
2. High Debt-to-Income (DTI) Ratio
It’s a rough world out there, especially if you’re trying to get a mortgage while being strapped to other debt. As the cost of everything goes up, it’s getting harder and harder for first or second time buyers in many areas to overcome the debt-to-income hurdle. Although stunning credit and a good down payment can help you stretch your debt-to-income ratios, many people are still faced with this predicament when it comes time to apply for a mortgage.
But don’t worry, there’s hope. A high debt-to-income ratio can be attacked from several angles. You’re bound to argue that some of them aren’t possible, but depending on where you live, they may be. Let the flame war begin! Here are your main options:
Focus on paying down debt. I know, it sounds trite when you’re barely able to make the rent and buy groceries, but you’ve managed to save something for a down payment, so there’s a little extra somewhere. Take that money you’re saving, at least part of it, and pay down some stuff. Think credit cards, bank loans, student loans and so forth — only things that report to your credit file will affect your debt-to-income ratio.
Lower your expectations. Again, I know how some of these things sound, but trust me on this. You may have your heart set on a $300k home, but if your debt-to-income ratio just won’t allow for it, find out what it will let you buy. Ask your lender how much they’ll lend to you right now if you absolutely cannot wait.
Have your Realtor show you a few of the best examples of homes in the price range you can afford today and walk into them with an open mind. You may be surprised how much money you can save on your purchase if you’re willing to buy a home that needs a little cosmetic work or that’s not in your first choice neighborhood.
Get yourself a non-occupying co-borrower. What’s a non-occupying co-borrower? Well, it’s someone who is willing to sign on your home mortgage, but doesn’t plan to live with you. This is a very particular designation, because your mortgage lender wants to know if a house is being used as your primary residence or a rental or a vacation home — and when someone who doesn’t intend to live with you signs on a house you plan to live in, well, it can get complicated. That’s why they have a whole category for that.
Your co-borrower can be almost anybody, so long as they don’t plan to occupy the home or have any interest in the transaction (with the exception of relatives, they can always co-borrow). So, your Realtor, your banker, your builder — those guys are right out. But pretty much anybody else would work for loans that allow this. However, for best results, you want to choose someone with very little debt and a hefty income to help balance out your flaws. They also need good credit. This person will remain financially liable for the life of the loan, even if you default or file bankruptcy, they’re still on the hook.
Carefully consider how much you want your parents or siblings involved in your house-buying process before choosing to use a non-occupying co-borrower with a conventional or FHA loan. I promise you, most will want some say, they’ll stick their nose in your business and they’ll take the wind out of your sails if you have a plan to buy something out of the ordinary. As well they should, since they’ll be hung with your house if you don’t make the payments. Option 2 is looking pretty good right now, isn’t it? (I’m only kidding, I’m sure your family is lovely)
3. Limited or Erratic Work History
Your lender may balk if you’ve not had a solid work history for the last two years. After all, they want to know not only that you can make enough to pay your monthly mortgage statement, but that your employment is steady enough to keep that income coming. Many people assume this means they have to work for the same company in the same position for that time — oh no. You’ve got options.
For example, if you’ve been working at your job for only a year, but were studying to get the degree the job required prior to that, many loan programs will accommodate you. Your bank would prefer to be able to chart your progress in your career and predict your income potential, but schooling and military service will often take the place of working in your current field.
Another exemption can exist for otherwise good borrowers who happen to work in a seasonal industry like construction. Those winters off don’t count as gaps in employment as long as you stay in the same field year after year. There’s also an exemption for stay at home parents who were working stable jobs before their children were born. You only need show two years of income in your field prior to making the decision to stay home.
Gaps in employment also aren’t deal killers, provided they’re less than a month long and can be explained. If you’re getting fired a lot or rage quit your job, they won’t fly, but if you’re trying to secure better positions or your company collapsed, it’s understandable. Today’s lenders will work with you on employment, if at all possible.
The same applies to self-employed individuals. As long as your business is established and you’re earning a living from it, you’re gold. Don’t go deducting everything you can find in order to get to zero or you’ll never qualify for credit.
4. Lack of Reserves
Most loans you’re likely to encounter as a first or second time buyer won’t require reserves, but if you’re trying to get into a home with less than ideal credit or are buying a second home so you can move and sell the first without you in it, your lender may need you to prove you can pay for both homes if push came to shove. I already wrote a lengthy piece on this subject, you can find it here.
The short of it is that if you have a vested retirement plan, own an IRA that you’re making regular contributions to or have a fully vested life insurance policy, they can work in place of reserves. You can also borrow “gift money” or sell something valuable, but those funds will need to be documented and, ideally, aged at least six months. So plan ahead!
The Bottom Line: Mortgages Are Tricky, But They’re Not Impossible
I know we’ve covered a lot of ground in this three part series, but the truth is that it’s uncommon that you’ll be tripped up by most of these things. You might hit one or two, but you and your lender will work together to deal with them — or you’ll find a different lender. I can’t stress this enough: if one lender turns you down, try another. Some lenders are more flexible in their approach to problems than others. Lenders who will help you overcome your issues are gold, though, so if your problem is a big one, let them help you.
The thing with mortgages is that they’re meant to be tricky. You’re not supposed to slam dunk them, but if you do so much the better for you. Resources like USMortgageCalculator.org and similiar sites can give you a good idea of what to expect and how to handle common problems, but you may still need the help of an honest to goodness on the ground expert in your area. Consider these websites the beginning of your education, not the sum total of it.