On its face, getting a home loan application approved is pretty basic fare.
All lenders who issue mortgages all follow the same general lending guidelines issued by mortgage giants.
The mortgage giants include Fannie Mae and Freddie Mac as well as government-backed programs including VA, FHA and USDA loans. Jumbo lenders can have their own standards but most, again, follow the same protocol. Lenders want to see a decent credit history as well as having enough money in an account sufficient to cover closing costs associated with the loan. There needs to be enough income to comfortably carry current debt as well as a new mortgage and an employment history. Credit, being able to make the payments and a job showing steady income. That’s it. But as any experienced loan officer can tell you, sometimes it’s just not that simple to get a home loan application across the goal line.
Even though lenders generally follow similar approval guidelines what’s not the same are the people on the loan application. The approval guidelines can be identical from one lender to the next but borrowers rarely are. There will be different income levels and different credit scores. Some bring home a pay check on the 1st and the 15th while others are self-employed. Even those that aren’t self-employed may have income from other sources besides their employer. When a mortgage application goes wrong it’s usually because the loan officer wasn’t aware of a particular situation that later arose or the applicants didn’t think something was important enough to mention. It’s the loan officer’s job to qualify you for the loan you need to finance your purchase and choose from a database of available loan programs that fit your profile. Here are some things that can throw a wrench in the mortgage approval process you may not have known about.
Bonus and Overtime Income
Income in general has two basic requirements a lender must validate- that there is a two year history of the income and the income is likely to continue into the future. Satisfy those two basic requirements for income and it’s all good to go. Even the self-employed borrower falls under the same guidelines as lenders request two years of income tax returns to show a consistent stream of income. But sometimes other income is used but the lender can’t make those two determinations. Bonus income can fall into that category.
There are different types of bonuses for any variety of events the employer decides to reward. A bonus can be regular in nature such as every month or every quarter or the bonus can be somewhat random. It’s the random bonus that can cause a few problems but even the regular bonus, if not documented properly, can cause a loan application to hit a brick wall.
When borrowers complete their loan application in the income section there is a separate line item asking for any bonus or commission income. Sometimes borrowers lump all their income in the “wages” section or even leave the bonus income section blank. When a loan officer reviews a loan application and there is no bonus income showing the assumption is made there is none. Yet if borrowers do need bonus income in order to qualify, the lender needs to take a couple of additional steps.
What is the nature of the bonus income?
Is it regular and based upon a verifiable event? For example, an employer offers a quarterly bonus for all employees who have perfect attendance and have a 100% customer service rating. The lender will need to contact the employer to explain how and when the bonuses are paid. This is typically accomplished by the lender sending a form to the employer called a Verification of Employment, or VOE. The employer will list the gross monthly income, year to date and sometimes income from previous years. Along with this verification form is evidence of the company’s bonus policy.
If the lender does not independently verify the bonus income by communicating with the employer the bonus may not be used. If the bonus income doesn’t show a regular history, such as getting a bonus one quarter but not the other three, it’s possible the lender could then make the determination the income is not likely to continue on a regular basis into the future.
For those who get paid by the hour, a lender can easily discover much someone makes each pay period. But often times there is additional overtime pay that shows up on a pay check stub. For the lender to count this income, not only does there need to be a history, just as with bonus income, but determine whether or not the overtime income will continue into the future. The lender may then ask the employer if it’s likely that overtime pay will continue. If the lender does respond that, “Yes we regularly pay overtime and it should continue” but in today’s environment, many lenders refuse to make any such promise. In such an instance, the lender must justify using overtime income on its own, primarily by documenting overtime income over the previous two years. Borrowers don’t have to provide two years’ worth of pay check stubs showing overtime being paid, that’s probably very difficult to do for most applicants, but lenders can compare gross annual income with a W2 form then subtract regular hourly earnings to arrive at an overtime amount.
Married, Separated and Not Quite Divorced
The standard home loan application specifically asks your marital status. It’s not about looking into your love life but seeing if there are any joint debts that may not be listed on your personal credit file. Soon to be discovered credit obligations of a spouse or even a former spouse can complicate matters if not addressed upfront during the initial credit approval process.
In a community property state married couples that acquire assets including property jointly own the asset. Even if one spouse buys and finances a home individually, keeping the other spouse off the application, any other monthly credit obligations belonging to the spouse not listed on the application must still be counted toward total monthly debt. For example, one spouse brings in a number of student loans into a marriage and later the couple buys a home. Leaving the spouse with the student loans off the application doesn’t relieve the remaining spouse from counting up the student loan debt.
For those that mark “separated” on a loan application the lender wants to know if they’re legally separated or just a common agreement until they get things worked out. If they’re legally separated and there is a recorded separation agreement signed by all parties, it’s still possible to include debt from both even though they have an agreement as to who pays why while they’re separated. Being separated only by a mutual agreement means the lender still considers the couple married and evaluates credit obligations as such.
Your loan officer should ask about any other debt not listed on the application, including any debt from an ex-spouse or soon to be an ex-spouse. If not and there is additional debt that shows up there really isn’t much a loan officer can do to ignore the additional obligations.
Another one of those little boxes is marked “Divorced.” The reason a lender wants to know if someone is divorced is to seek out any additional debt, including spousal support and child support payments. Such payments rarely appear on a credit report or when they become delinquent and action has to be taken in order to collect back support such as a court order. If someone checks the “divorced” box on a home loan application the lender will automatically ask for signed copies of the divorce decree, including, and perhaps most importantly, the signature of the presiding judge. If there are any support payments made to an ex-spouse or for child support, those amounts will be listed as well as how long those payments are to be made. Many times support payments automatically end when the child turns 18 or graduates from high school. Payments made to an ex-spouse may also stop when the spouse receiving the support payments remarries.
It’s not an uncommon occurrence to have the “divorce” box not checked when in fact the person has been divorced, especially by someone who has remarried. But there can be a time when a divorce isn’t indicated and the loan officer asks for a divorce decree anyway, or at least asking if there has been a divorce in the past.
How and why?
When women marry that most usually take the husband’s name. Credit reports not only report credit histories but where someone has lived and if they’ve ever gone by another name. If more than one last name pops up on a credit report that can be an indication of a divorce in the past. And even though many times it’s the husband who is responsible for support payments it’s not always the case.
Rental Property Miscalculations
Income from rental properties at first glance seems relatively easy to document. After all, the lease agreement clearly states the amount of rent, when it’s due and when the lease expires. As it relates to a two year history of rental income however, even if a lease expires in one year the lender assumes the income will continue with a new lease either with the current occupant signing a new lease or finding a new tenant.
When a real estate investor buys a new rental property, the appraiser who supports the sales price of the home will also perform a market rental survey on the property. This is an addition to a standard appraisal and may cause another fee to be added to the cost of the appraisal. The appraiser surveys rental properties of similar homes in the area and arrives at an estimated amount. If the applicant has multiple properties, the lender can count the income from the unit even though the income has yet to be received. If this is the first rental unit the borrower acquires, no rental income can be used to help qualify. Lenders want to see at least two years of landlord experience before counting such income. They do this by reviewing income tax returns.
Rental income on income tax returns isn’t the same as the gross rental income appearing on a mortgage loan application. Tax returns will show actual expenses on the property including mortgage interest, property taxes and insurance. If there are any property management fees they will also be listed here. Real estate investors are also allowed to depreciate their real estate holdings which can often cause the income tax returns to show a loss. However, depreciation is not counted by a mortgage company when reviewing income. It is the gross rent less expenses that matters and the tax returns trump all other rental income documentation.
Mortgage companies may also discount any rental amounts to offset any future vacancy. A common discount is 25% of the gross rent and assumes the unit won’t always be 100% occupied and therefore the income used to help qualify won’t be there 100% of the time.
Home Loan Application For Condominiums
Mortgage loans actually issue two approvals, one for the applicant and one for the property. Not only does a lender need to know the current market value of the home being used as collateral but if there are other homes in the area similar to the one being financed. But condominiums take the approval process a bit further.
When someone buys a single family home they buy both the home as well as the land on which it sits. With a condominium, they buy the space within the walls of the individual unit and share the common areas such as sidewalks and workout facilities equally with the other tenants. Condominium units are also prone to rental properties, particularly those near schools, shopping as well as vacation areas. This alone isn’t any big deal but what can be a big deal is how many units are owner occupied and how many owners actually live in the unit.
Mortgage lenders must also make sure the condominium project has sufficient insurance to cover the common areas. The lender wants to know if more than one individual owns more than 10% of the units. This is important to a lender in the event that individual experiences some serious financial event that could cause a default on the units financed, causing the lender to foreclose on the properties. If a condominium project is a conversion from an existing apartment building there are still more requirement’s that must be met.
Mortgage lenders use a form commonly referred to as a “Condo Questionnaire.” This form asks all these questions and more about occupancy and insurance and other details and is completed by the homeowner’s association or condominium management. If for example more than 50% of the units are rental properties the lender would most likely turn down the mortgage application due to the number of rental units compared to owner occupied properties.
Past Due Income Taxes
When individuals can’t pay their total income tax bill for the previous year or have outstanding federal taxes, the IRS will typically create a payment agreement where the past due taxes are paid in installments. These additional monthly payments won’t be reflected on any pay check stub and usually not on a credit report. It’s up to the borrower to disclose these monthly amounts and enter those amounts on the loan application.
The mortgage company will then need to confirm these payment amounts as well as document these payments have been made on time, just as with any other credit obligation. When a payment agreement is made with the IRS the IRS also files a tax lien on any real property the borrowers own. The lender will ask for confirmation these payments have been paid when due and the terms of the payment plan. In the event of refinancing a mortgage loan with a federal tax lien, this can present a problem as a federal tax lien is considered a superior lien and will not automatically subordinate to a new mortgage. In order to refinance an existing mortgage on a property that has a federal income tax lien, the IRS must agree to subordinate to the new mortgage. It’s also important to understand the IRS is under no obligation to do so.
When a home loan application is turned down, it’s usually because something unexpected happened during the approval process. When an experienced loan officer provides an applicant with a preapproval letter and the application has been reviewed and credit evaluated, it’s almost a given the transaction will close on time. Loan officers know what to ask and when a preapproval letter is warranted but when something comes up that is unexpected, that’s when things can go awry.