Global Grind’s financial coach and author of Yes, You’re Approved: The Real Deal About Getting a Mortgage and Buying a Home, Lynn Richardson, reveals secrets about getting approved for a mortgage in today’s economy.
Even in light of the recent foreclosure crisis, buying a home is still a promising way to build wealth over the long term, because property values are at an all time low and you get to write off the great majority of the interest and taxes you pay each month on your income tax return (i.e., you CANNOT write off your RENT payments for your primary residence, but you CAN write off your MORTGAGE payments). So, you’re ready to buy your first home or re-enter the homebuying process, but the lender is telling you that you can’t get approved for one reason or another – in many cases, they may say “you don’t make enough money” or “your debt ratio is too high.” Typically, if your housing ratio cannot be higher than 31% (total monthly mortgage payment divided by your income) and your total debt ratio cannot be higher than 43% (total monthly debts divided by your income). Here are a few secrets that will help you get approved if you are being told that your debt ratio is too high:
1. Other Peoples’ Debt: if you co-signed for someone and that person pays the bill and you do NOT want this debt to be included in your debt ratio when qualifying for a mortgage, you need to provide the following:
a. 12 consecutive cancelled checks documenting one year of timely payments from the other person’s bank account (if it is a joint bank account with you, it won’t work!)
b. Any additional documentation that validates that the other person is paying the bill (for example, repair bills for the car, receipts and signatures of the other party, etc.)
2. Less than Ten Months Owed on a Bill: For most loan programs, installment debts (car notes, student loans, etc.) that have less than ten months to completion do not have to be included in your debt ratio -- this is not the case for revolving debts (credit cards, charge accounts, etc.)
3. Overtime, Bonus, Part-time Income: If you have a two year history of overtime, bonuses, or income from a second job, this income can help you qualify for a home. In most cases, you must be able to document this income source for the previous two years and your lender will take a 24 month average. So if you earned $5,000 in overtime last year and $3,000 in overtime the year before, then this is how much additional monthly income can be used to help you qualify for your home: ($5,000 + $3000) divided by 24 months = $250 additional monthly income
4. Taxes and Insurance Too High: Did your lender overestimate the monthly taxes and insurance for your home? Ask your lender to make sure your payment estimate is based on accurate information and provide a current real estate tax bill, home owners insurance quote, or other documentation to support your application. Even if you lower you’re the estimate by just $50 monthly, this could help you get approved to buy your home.
5. Assessments Minus Utilities: If you will pay assessments for the purchase of a condominium or townhome, then the portion of your assessments that cover utilities (electric, heat, water, cable) DOES NOT have to be included in your debt ratio calculation. Obtain a budget or other documentation from the homeowners association that clearly outlines the portion of the previous year’s assessment payments that were allocated to utilities. After this amount is EXCLUDED from your monthly mortgage payment, your debt ratio will decrease and you may be eligible to buy a home.