Mortgage Qualification Rules Are Not Always Black and White

April 22, 2015

Some of the more interesting questions I receive from readers are about unusual situations that may affect their ability to qualify for a mortgage. The rules are not  always crystal clear, which is why lenders continue to rely on underwriters whose stock in trade is good judgment.  Here are a few illustrations.

Will the Spouse’s Unprofitable Business Derail the Application?

 “I have W-2 income with the same employer for over 10 years that is sufficient to carry the mortgage amount we are requesting. My spouse is self-employed and has had business losses for the past 3 years. These losses are deducted from the adjusted gross income reported in our joint tax returns. We will own the house jointly. Question:  Should I leave my self-employed spouse off the mortgage application?”

I would submit the application in your name with your  income, indicating   that title will be held jointly. This is common and what most couples do when only one is working but both will own the house. You proceed just as you would if your spouse was not employed.  If the underwriter is satisfied with the transaction, which is very likely because of your high credit score and down payment of 20%, that will be the end of it. 

There is the possibility, however, that the underwriter will request your tax return. Before the financial crisis, this seldom happened when an applicant could document income with W-2s. Now it happens occasionally.  If it happens in your case, the underwriter will see the losses, and in the worst case, will decide to deduct the losses from the income used to qualify. The more likely possibility , however, is that the underwriter will elect to ignore the business losses because you can document that the losses have been funded out of savings and not out of your income. Another possible reason for ignoring the losses would be that they have come to an end because the business has turned the corner, or it has been shut down. 

Will a High Ratio of Land Value to Structure Value Derail the Application?

 “My house sits on a very large plot of land, the ratio of land value to structure value being about 4 to 1. I’m looking to raise cash through a cash-out refinance. Is this possible”? 

If the high ratio is due in part to the property being a working farm, it won’t qualify with Fannie Mae, Freddie Mac or FHA. If the property is strictly residential, you will still have trouble because of a general rule that land value should be no greater than 35% of total appraised value, and properties should not exceed 10 acres. This rule is far from rigid, however, and much depends on the extent to which the property is similar to others in its market area, and how large a loan you are seeking. 

Qualification rules often hinge very much on whether or not a reliable appraisal is possible, which depends in turn on whether the property is similar to others in its market area. Waterfront properties frequently are acceptable with high ratios of land value to total value because they usually exist in clusters, which means that appraisers can usually find comparable properties that have sold recently. At the opposite extreme, appraising a 10-acre wooded property in a market area in which 1-acre lots dominate is extremely difficult because there are no transactions in properties that are comparable. A loan may still be available,   but only if the acceptable loan amount is based on a value that ignores the 9 extra acres. 

Will a Job Change Enhance the Application?

“I am planning to relocate to a new job which will pay me a lower salary than my current one but it has a high bonus potential. Counting the bonus, I will be making more overall on my new job. Will I qualify for a larger mortgage?”

No, you will qualify for a smaller mortgage based only on your lower salary, until such time as you can demonstrate that the bonuses are a reliable source of income.

In qualifying borrowers, lenders are interested in the income that can safely be assumed will be available, not income that might or might not be available. So if you leave a job that pays less but has a large potential bonus, the income your lender will accept goes down.

If you hold the new position for some time and can demonstrate that the bonuses come in regularly, then the lender will accept them as part of your income. But the burden of proof is yours, you must convince the underwriter.

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