Stated-Income

What to Do if You’re Rejected for a Home Loan

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Applying for and being rejected for a home loan isn’t a good feeling, but it doesn’t have to be the end of the road for your potential home-ownership. If you take the right steps, you can try again in the near future.

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Follow these steps if you find yourself in this situation.

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If a bank or lender turns you down for a loan, they have to give you a reason. If you don’t understand the reason provided, ask for more specifics. If it has anything to do with your credit, they have to send you a letter stating the reasons for the denial. If it was to do with anything besides your credit, most loan officers will happily walk you through the reasons that you were denied.

Once you have the reasons, it’s time to take action. You are armed with information on what is wrong with your application, now you can take the steps to fix those issues.

Fix Your Credit for Your Home Loan Application

Did your loan officer tell you that your credit was the issue? Following are the most common credit issues:

  • Low credit score – If your credit score is too low, it’s time to pull your credit report and found out why. The letter your lender sends you will explain how you can receive a free copy of your credit report because you were turned down for a home loan due to a credit issue. Get a copy of your report and look for the reason for the low credit score. Was it late payments? Did you charge too much on your credit cards? Do you have too many inquiries?
  • Not enough credit – If you only have a few trade lines and they aren’t currently active, a lender may not be able to make a lending decision. You’ll need to build your credit up by applying for a few credit cards and using them. Don’t take this as permission to go out and go on a spending spree, though. Instead, charge what you normally purchase and pay cash for, then pay the bill off in full each month. This will establish good spending patterns and help you build up your credit.
  • Too many inquiries – Inquiries are a red flag for lenders because they could indicate that you have new credit out there that hasn’t reported yet. You may just have to wait it out a few months to prove that you don’t have any new credit lines (if you don’t) or let the new credit lines report on your credit report for the lender to get an accurate credit score and debt ratio calculation.
  • Negative economic events – If you recently had a bankruptcy or foreclosure, you may not have let enough time pass. Each loan program has a specific waiting period. Ask the lender how long you need to wait. In the meantime, keep improving your credit score to enhance your chances of approval the next time you apply.

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Deal With Low Income

If the lender decided you don’t make enough money, they could turn down your application. While you might think there’s no way to fix this issue, there are a few simple ways.

  • Take a side gig – Do you have a skill that you could turn into a side job? Whether you offer physical services, such as electrician work, plumbing, or painting or you do something on the internet, such as writing, crafting, or a virtual assistant, there are many ways to make money on the side. You’ll have to have the job for at least 2 years before you can use the income for qualification purposes. If that’s too long, you can use the extra money to pay down your debts and lower your debt ratio to help your chances of approval sooner.
  • Get a cosigner – If you have a willing cosigner that has good credit, they can help you get approved for a home loan. Make sure it’s someone that is willing to take the obligation of paying the mortgage should you stop paying it. This is a large risk on the cosigner’s part, so make sure there is a clear understanding between both of you.

Deal With Your Debts

Did the lender tell you that you are straddled with too many debts? It’s time to work on them before you apply for another mortgage.

  • Pay the debts down – It’s time to set up a strict budget to get your debts paid down. If you don’t have extra money lying around, take a second job or side gig to boost your income. Then use that extra money to pay your debts down.
  • Apply for a lesser loan amount – If it was the housing ratio that was the issue, it might be time to look for a less expensive home. If your credit score was fine and your income is stable, consider a lower sales price, which means a lower monthly payment.

Increase Your Down Payment on the Home Loan

Sometimes it’s just about the amount of collateral you give the lender. If you borrow a large percentage of the sales price, the lender may see it as too high of a risk. Increasing your down payment can minimize that risk. This could take time though, since you’ll have to save money. Using some of the above strategies, such as paying down your debt or taking on extra work can help you save money faster. In some cases, you may even be able to secure gift money for the down payment from family or your employer. Most loan programs allow the use of gift funds to help boost the equity you have in the home and the collateral the bank has to rely on if you default.

Getting turned down for a home loan isn’t fun, but there are ways to overcome it. Use these tips to improve your chances of approval and get the loan that you want to buy your next home.

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Does Adding a Co-Borrower to Your Mortgage Make Sense?

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Does Adding a Co-Borrower to Your Mortgage Make Sense?

The concept of adding a co-borrower is a common practice in the mortgage industry. It’s a practical move to share the costs of holding a mortgage or help you qualify for a bigger loan that you might not be approved on your own. In the initial or later stages of mortgaging, you can put in another name as a borrower to your loan.

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During the Application

When you ask a spouse, a friend or a family member to sign up on a mortgage with you, you are basically “pooling” all your income, assets and credit history together.

With the ability to repay rule in place, lenders are required to do a capacity check requiring traditional or alternative documentation as in the case of stated income loans. In the course of this verification, they might find that your monthly debts relative to your monthly income, as measured by the DTI ratio, is too high. If your co-borrower has a steady income (and that he/she has a lower debt-to-income ratio), it will help you qualify.

Similarly, you and your co-borrower could add your assets such as cash deposits, stocks and bonds to qualify for a loan with a bigger amount perhaps. Lenders check assets to see if these could support your closing costs, fees, and mortgage payments. There is also a reserve requirement that depends on the type of property you are buying.

To be clear, a co-borrower with a stellar credit will help you qualify and possibly get a lower rate only if you have a fairly good credit record yourself. Lenders will consider the lower of the two credit scores and if your score falls further behind, it won’t help in your application.

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During a Refinance

You can refinance to add a co-borrower to the loan. Just like when applying for a new mortgage, you and your co-borrower go through the verification process anew, income, assets and liabilities and credit history be under review.

Adding a co-borrower to an existing mortgage through a refinance is different from adding him/her to the title deed of your house. Except when he/she is related to you by blood or a spouse, a mortgage co-borrower does not have a security interest in the property although he/she has to pay back the loan with you.

Without a Refinance

You can skip refinancing and add a co-borrower to the mortgage but only to a certain extent. For instance, you add someone to the mortgage to put into writing his/her promise to pay some or all of your mortgage debt.

If your purpose is to add a child, spouse or parent, you are better off adding them to the mortgage deed, as mentioned above. They can be co-owners but not co-borrowers so they won’t have to be held equally responsible for repaying the loan.

Otherwise, you still need to refinance so you can add a co-borrower on top of getting a low rate, taking cash out of your home, shorten or extend your loan term, etc.

Be sure to ask your lender about the implications of getting a co-borrower and the options to remove him/her should there be a falling out as in the case of divorce.

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How Compensating Factors Help Stated Income Loans

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How Compensating Factors Help Stated Income Loans

Stated income loans are still around, believe it or not. While they might have the same name, though, they are a completely different product. Lenders still verify your income; they just do so in a non-conventional way. If you do not have paystubs or W-2s to verify your income and your tax returns are not an accurate reflection of the amount of money you make each year because of the large amount of write-offs you take, a stated income loan might be the right answer for you. Before you start applying with different lenders, though, you should understand what compensating factors most lenders want to see in order to qualify you for the mortgage.

Large Down Payment

One of the easiest ways to convince a lender to approve you for a stated income loan is to have a large down payment. There is no minimum amount required as each lender creates their own program because subprime or alternative documentation loans are typically lender funded. So what a large down payment means to one lender might differ for another. In general, the closer you can get to a 20 percent down payment, the better off your chances are of getting approved.

You might wonder what difference a large down payment makes, but it is a very large difference. This compensating factor gives lenders peace of mind because you have such a large amount of money invested in the home. This means that you will more than likely try very hard to keep up with your payments. Let’s look at two different examples:

  • Borrower A puts down the lowest down payment a lender will allow. This amount is 5% of the purchase price. If the purchase price was $200,000 that means the borrower put down $10,000. That seems like a lot of money, but it is only 5% of the amount of money the lender is giving you.
  • Borrower B puts down a much higher down payment of 20 percent. With the same $200,000 loan amount, the borrower puts down $40,000. This is a significant amount of money which the borrower is probably very likely to work hard to avoid losing.

Both Borrower A and B put down quite a bit of money, but with $30,000 more invested in the home, Borrower B is much more likely to try to avoid foreclosure than Borrower A, which makes the lender more likely to approve Borrower B than Borrower A.

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Good Credit Score

Believe it or not, a good credit score could be the only compensating factor you need. Because stated income loans provide the lender with a risk because they are not verifying your income the standard way, but are relying on other documentation, such as your bank statements to verify your income, they want to know that you are a good risk. The best measure of your level of risk is your credit score. The higher the score, the better payment pattern you have. This means you are more likely to continue that pattern in the future, including the payments on your new mortgage. What one lender considers “good” credit might differ from another lender, though. In general, the following is how credit scores are viewed:

  • Scores over 750 are considered excellent
  • Scores between 749 and 700 are considered good
  • Scores between 699 and 650 are considered fair
  • Scores between 649 and 600 are considered poor
  • Scores lower than 600 are considered bad

Again, different lenders might look at scores differently, but if you have a credit score of 750, most lenders will not turn their heads at your application. On the other hand, if you have a score of 600, you might have a harder time finding a lender that is willing to give you a stated income loan because of the level of risk involved and the complicated risk you provide with your low credit score. On average, lenders want to see a credit score over 680 in order to use alternative lending, but some lenders might be willing to take a lower credit score if you can compensate in other ways.

Consistent Employment History

One thing that any lender looks for in any type of program is consistency. You need to be able to show that you stayed at the same job or at least within the same industry for the last few years. You also need to show that your income was consistent as these two factors can go hand-in-hand. Here are a few examples:

  • You have a five-year job history at your job, never changing positions. Your income increased slightly each year from a raise.
  • You have a two-year job history at your job, never changing positions and your income stayed the same during that time.
  • You have had two different jobs within the last two years, but they were within the same industry. The second job provided you with a much higher income than the first job. This shows that you were able to better your situation, which is typically not penalized because of the lack of a two-year job history.
  • You are self-employed for two years and have the proof from your licensed CPA stating that you have been self-employed during that time.
  • You are self-employed, but only for one year, but your job prior to opening your own business was in the same industry and was for 10 years.

As you can see, consistency can mean many different things; it does not mean you are stuck at the same job for the rest of your life if you ever want to qualify for a mortgage, even a subprime mortgage.

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Credit Guidelines for Stated Income Home Loans

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Credit Guidelines for Stated Income Home Loans-STATED-INCOME.COMThe housing crisis of 2007 made stated income loans a thing of the past. They were single handedly accused of being the reason for the crisis and were therefore removed from the market. Since then, however, these loans have made a slow comeback for a small portion of the community. Not everyone will qualify for this niche home loan product because of its strict requirements thanks to the new Dodd Frank regulations that all banks must ensure that a borrower can effectively afford a mortgage, but many people still qualify. One of the most important aspects of a borrower for this type of loan is the credit score. Plain and simple – bad credit will get you nowhere.

Minimum Credit Scores

Since there is not any regulation regarding stated income loans, there is not one specific credit score that will qualify or disqualify you for this type of lending – it is up to each individual lender. The lenders that are willing to step out on a limb and not offer Qualified Mortgages are taking a risk because they are no longer provided the guarantees that the QM guidelines offer including the ability to sell the mortgage on the secondary market or protection from litigation from borrowers. Because of this, it is up to each bank’s discretion what credit score they consider high enough to signify financial responsibility.

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As a general rule of thumb, however, most banks will not consider a stated income loan with a credit score lower than 700. The only exception to this rule would be if you had serious compensating factors to make up for the lower score and lack of verifiable income. Compensating factors in this case typically include:

  • Large amounts of reserves in the bank
  • A large down payment (more than 30 percent)
  • Low debt ratios based on the stated income on the application that coincides with the reserves in the bank

If you wish to pursue stated income loans because you cannot verify your income in a way that will enable you to obtain a conventional loan, you need to make sure your credit is in order. If you have many late housing payments or even installment loan payments made late in the last 12 months, it is best to wait until those are at least 12 months behind you. This gives you time to increase your credit score while making timely payments in order for a lender to take your application seriously as it is very high risk for them to offer this non-qualified loan.

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