Income

When you have no income or not enough income to qualify for a home loan there are options

Adding another person as a Co-Borrower on the loan to qualify for income

In situations where the borrower just doesn’t have enough income to qualify or the income that they earn somehow does not fall in acceptable categories to be used for qualifying, a co-borrower may be the easiest solution. Adding a co-borrower, either one that will live with you or a non-occupant co-borrower can also help you qualify as the lender will use both of your incomes as the total. If the person is living with you such as a roommate, significant other or a spouse and they are planning to continue to do so then this is a pretty easy thing assuming the other party also has reasonable credit and a solid history of income. Note that both borrowers are equally responsible for the home payment and the mortgage obligation.

Aside from someone who is already living with the borrower or is a significant other, it’s also possible to have a relative such as a parent be a non-occupant co-borrower. This would be a person that doesn’t actually live in the home, but would be obligated on the loan. Each program tends to deal with this differently and how the income is calculated for qualifying. Below is a breakout of each of the standard programs in relation to this to help you navigate according to your own particular situation:

  1. Conventional – Fannie Mae:
    • Primary borrower who will live in the home must have 5% of their own funds unless there is a down payment of at least 20%
    • If the loan is unable to be approved through the automated underwriting, a manual underwrite will require that the occupying borrower have no more than a 43% total debt-to-income ratio. The automated underwriting algorithms likely will not approve something where the combined debt-to-income ratio is higher than 45-50%. It also may limit the occupying borrower to the 43% guideline. This would be the new payment + outstanding installment and revolving debts divided by borrower gross monthly income.
  2. Conventional – Freddie Mac:
    • If file is manually underwritten, the most that can be borrowed is 90% – or 10% down payment and the occupying borrower will be limited to a payment ratio of 43% of their gross monthly income.
    • If it is run through automated underwriting and is approved then there isn’t a requirement to calculate or evaluate the occupying borrower’s debt ratio. Typically it will accept the total merged income of both parties, allowing the non-occupant co-borrower to have the bulk of the income to qualify. Algorithms change periodically though. This can be an advantage over Fannie Mae’s program in select cases.
  3. FHA:
    • If the non-occupying borrower is a family member then income
    • If the non-occupying borrower is not a family member or the transaction is a 2-4 unit property or it is with a transaction where a family member is selling to a family member who will be a non-occupying co-borrower then the loan-to-value is reduced to 75% – or 25% down payment/equity position
    • Income and debts from both parties will be used for qualifying on the loan
  4. VA:
    • While a co-borrower is allowed on VA, if the co-borrower does not live in the property then the limits of the Guaranty may be effected. Since this may vary from lender to lender, consult a mortgage professional on your specific circumstances if you are getting a VA loan with a non occupying co-borrower or co-signer.
  5. USDA: The USDA loan program does not allow for non-occupant co-borrowers. A conventional or FHA program will be better options if you are unable to qualify without the assistance of a non-occupying co-borrower.

Paying off debts can assist in qualifying if your total debt-to-income ratio is too high

If your total debt-to- income (total divided by gross monthly income) is higher than 43%, you can reduce that by reducing debts. The best way to do this is to either do it before you apply for your loan or if you are in the process, tell them you will do it at closing. Having debts paid at closing as part of the transaction saves a lot of chasing down lenders, paying for credit supplements and providing of letters and receipts to prove that they have been removed.

Otherwise, it’s a smart idea to pay them before you apply for the loan. The advantage of doing this before you apply is that it should have a good impact on your credit score and this will help with getting approved and possibly get you a better rate as rates mortgage pricing often takes into account the score of the borrowers.

So where can money come from to pay off debts at closing so that you qualify, if you don’t already have it? There are lots of ways to do this:

  1. Sell personal items. This can be done by a garage sale, Craigslist or various marketplaces. If you sell something that is more than half of your monthly income, be sure to keep a copy of the ad you ran and any paper trail to show what you sold. This isn’t just a good idea for records, it is also something to provide to the lender as a paper trail in case they ask you where that big deposit in your checking account came from.
  2. Sell a vehicle or recreational item like boat or trailer. Be sure to keep a copy of your title transfer for evidence to provide to your letter.
  3. Get a gift from a family member. Many parents or siblings are willing to gift funds for a home purchase since it is a good long term investment and takes care of a primary need. There are particular requirements for gifts like verifying that the giver has the funds already and that they are transferred to you and not expected to be repaid. Your lender will have a gift letter form for you to use that will help meet the requirements.
  4. Take a temporary during your off hours to save up some extra to reduce those debts.
  5. Consider a consolidation loan that will make payments lower. If you own a car free and clear, it could be advantageous to refinance it, take the cash and retire debts
  6. If you have access to and qualify any local Down Payment Assistance programs if you aren’t in one already, you can use that as down payment and any other cash to pay off your debts.
  7. Do you have a talent? Team up and throw a party or teach a class in art or music and charge an admission
  8. Hire some musicians and borrow a backyard for an informal but fun roof raiser concert
  9. Be creative! Chances are you may have some outside the box ways to reduce debt and get the expenses down. You may have a far better idea than any of these!

Always go back and ask the question – what are you living on?

If you can verify it with bank statements and receipts, it could fly on an alternative program. Are you retired and not taking Social Security, but drawing regularly from your IRA? If you can prove you have done this with tax returns for the past couple of years, that income can be used to qualify you. It’s a special circumstance through Fannie Mae. It doesn’t hurt to sit down and have a hard look at your budget and see where your regular income is coming from and asking if you can document it. Even if you don’t fit the regular boxes, there are other programs out there that can assist you, though they often carry a higher rate. Review the types of income that are most common and review the common types of self-employment. In Oregon, Washington and California, please reach out here and someone can consult with you on options. Otherwise, find a mortgage broker in your area that has a good representation of lenders and can consult with you in regard to your particular situation.

Kristin M Eklund NMLS #1872091
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