Underwriters have qualifying income guidelines that are unknown to the borrower. If you think common sense is important, it is, but not when it comes to the ways borrowers are qualified regarding their income. The one thing all lenders have in common is that they ideally like at least a two year work history, but you can still qualify if you have less than two years with compensating factors such as a big down payment, a graduate degree, great credit, a good salary in a growing industry or a strong co-signer, just to name a few.
A gap is when you leave your current job usually with the intention of returning. There are many reasons such as having a baby, being laid off, taking some time off, relocating, etc. A gap does not mean you can’t get a loan, but that gap has to be filled if you need that income to qualify. You will have to return to work and, fyi, never quit your job until after you close on your loan.
If you are a straight W-2 employee with pay stubs, gross income is used, as long as you have a two year history and paystubs to support your income earned.
When do things get tricky?
Divorce situations – Many times one of the spouses was not earning income and needs a place to live. The key here is to make sure that alimony and child support come in for at least three years, or even exes can co-sign for a new loan and home which may free up the existing asset for sale.
Self-employed – The tendency is to write off expenses and decrease income. Of course, that is fine as long as you stay within the IRS guidelines. If you want mortgage financing, though, better make sure that you leave enough income to qualify. Lenders look at two years of income and take an average of those two years unless there is declining income which may pose a red flag. If you didn’t show enough income to qualify in one year, file the next year asap and report as much income as needed in order to qualify.
Low income but substantial cash liquidity – A little known fact is that if you have liquid assets, and you are a borderline case, you can use those liquid assets to tip your income over with a little known underwriting guideline called asset depletion. Asset depletion allows the lender to give you income and qualify you based on a formula that takes the liquid assets and pro rates a monthly income amount.
Maternity leave – Did you know that when a borrower is on temporary leave from work (for example, maternity leave), if that borrower returns back to work AFTER the closing date but BEFORE the first mortgage payment is due, their full income can be used?
Conversion from 1099 to w-2 – Converting income from 1099 to w-2, strangely enough, is fine and you will get full credit for the income as long as you are in the same industry as you were before. The problem begins if you go from a w-2 to a 1099. Getting paid as a consultant or 1099 is defined as being self-employed which typically requires two years in business and an average of that income.
Did you know that all three agencies (Freddie, Fannie, and Ginnie) differ slightly on a borrower’s gap in employment? It’s true! Below is some guidance:
Freddie Mac: Gaps in employment more than 60 days in length must be documented with a borrower’s explanation and on the 1003.
FHA: Gaps in employment of six months or more can still be considered IF the borrower has been employed at the current employer for AT LEAST six months AND a two year work history PRIOR to gap can be verified. ( FHA guideline NOT Sierra overlay)
Fannie Mae: Does not directly address gaps in employment so it is up to the underwriter to determine the borrower’s stability of income and ability to repay the mortgage.
Now you know that a GAP is not just a store where you buy pants, but something to pay attention to when you want to buy or refinance a home.
Carl Guzman, NMLS# 65291, CPA, is the founder and President of Greenback Capital Mortgage Corp. a Zillow 5 star lender http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y .He is a residential and reverse mortgage financing expert and a deal maker with over 26 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected]
