Applying for a home loan these days requires detailed documentation. Expect to show everything from full tax returns, pay stubs, and bank statements to letters of explanation regarding your credit, debt, income, and assets. However, that leaves quite a bit of room for challenges to pop up. Here are four common roadblocks you may encounter in the mortgage underwriting process, and how you can fix them.
1. Changes in your income
Let's say the underwriter at the loan company determines -- based upon your pay stubs and tax returns -- that your income is lower than what the loan originator said it was. An easy way to offset that is a written verification of employment, which specifies and breaks down your income. This is especially important if you're an hourly wage earner with gyrating income -- such as varying hours worked, bonuses, or overtime -- that has not been consistent for most of the past two years.
Lenders like to see two years of more or less consistent income history, but there are ways to work with that. If you don't have this, you'll need a lender who can work with your ancillary income with less than 24 months. This is the type of thing that can make or break your loan, especially with income outside a traditional fixed salary.
2. Your debt eats up too much of your income
A lender considers what your payment-to-income ratio will be with the new mortgage, so you can encounter a problem if your consumer debts (e.g., student loans, credit cards, and auto loans) are just too large for the mortgage amount you're applying for. If your debt-to-income ratio exceeds 45%, to still qualify, you'll need to make a change in any of the following ways:
- Reduce the payment on the mortgage
- Reduce and/or remove the payments on the consumer loans
- Re-evaluate the income
Here's how your payment-to-income ratio -- also called the debt-to-income ratio -- is calculated: Take the minimum payments you have on all current consumer obligations, add those to your proposed total mortgage payment, and divide the sum of those numbers into your monthly gross income.
3. Paying off your debt the wrong way
Let's say you have credit card payments totaling $300 per month on a $10,000 balance spread out over two to three credit cards. You decide to pay off those credit cards to reduce your payment liabilities, thus lowering your payment-to-income ratio.
This can be very tricky if not done correctly, and can very easily skew the underwriter's perception of what your liabilities truly will be by closing. When you pay off consumer debts to qualify for a mortgage, the account(s) must be closed as well. This can be problematic, as closing credit cards can have a negative impact on a healthy credit score. It is true you could simply reopen the credit cards after you close on the mortgage anyway, but lenders do not view it that way. They assume you'll close the cards and not open them later on.
An alternative option involves getting an updated credit report that shows the debts are paid off in full without any payments due. The key is to make absolutely sure each creditor whom you paid off in full specifically reports to each credit bureau a zero balance and a zero payment due.
Before you pull your credit reports, you can monitor changes by looking at your free credit report summary on Credit.com, which is updated every 30 days.
4. Negative events on your credit report
Let's face it -- mortgage loan originators are human, and they make mistakes just like everyone else. Let's say your mortgage officer did not ask or was unaware of your having a previous short sale in the past four years. If it happened within the past four years, this can stop your conventional loan in its tracks, which could mean you'd have to move to an alternative loan program, such as FHA.
Lenders run each borrower through a comprehensive background screening through multiple fraud databases, which would identify any other property you were tied to in the past seven years. If any other unaccounted-for properties pop up, documentation will be required to show either the property is no longer yours or it was sold, or the carrying cost of that property would be factored into your payment-to-income ratio.
If you are not sure about something financially related to your loan application, be sure to ask your loan professional. Should any unforeseen roadblocks pop up in your mortgage loan process, call your loan officer right away to explain the situation and get a read on what type of documentation will be needed to satisfy the condition and/or the problem. A loan professional who has experience working with the type of mortgage you're trying to obtain can guide you through to a successful closing.
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