FHA Loans For Moms Returning to Work

Recently I wrote about how a mortgage approval pretty much lives and dies through income verification these days. While it may seem like a dramatization it really is not, in fact its almost an understatement. This is because not only is income verification important but your employment history is equally important. I bring this up because recently I’ve had to qualify a young couple for a home and the employment history of the co-borrower became a cause for concern.

FHA Loans for Working MomsThis young couple, whom we eventually were able to approve, had an excellent credit history and were not first time home buyers. In fact considering how young they were I was very impressed with their home buying savvy. The main issue for this couple was that they needed both of their incomes to qualify for the house they wanted. Using both incomes meant they were well within the DTI limitations for the loan program and were in a very strong financial position.

The kicker was that the co-borrower had recently rejoined the work force after having stayed home with the kids for a few years. This posed a slight problem for the loan approval because certain criteria had to be met in order to use this co-borrowers income for loan qualification purposes. Since we were doing a FHA loan program the co-borrower had to me the following criteria:

  1. The borrower must have been working for at least one year on the current job.
  2. The borrower must have worked at least two years before leaving the workforce to stay at home with the children.

Both of these conditions needed to be met in order for the co-borrowers income to be used. The FHA underwriter made it clear that meeting only one was not sufficient. In our case the co-borrower was able to furnish W2’s for two years from their last place of employment and it helped that she had been working for the past year. So, we passed on both counts. Certainly a hurdle that no one had expected had been crossed and everyone was pleased.

FHA certainly doesn’t want to penalize a stay at home mom or any other kind of borrower who had to temporarily leave the workforce. But a stable job history is the only way to determine the earning potential for a borrower. So, if you are in this kind of situation make sure you have the necessary documents to prove to a lender that you will indeed be able to make the monthly payment.

Loan Approvals Depend Entirely on Income Verification

I’ve written plenty about the importance of having a good credit score and maintaining a clean credit report. From getting a job promotion to finding the right spouse, your credit score can play a much more ubiquitous role than ever before. That was then, but this is now. In today’s changed lending landscape your perfect score doesn’t mean as much as the lenders ability to verify your income! It’s that simple. “Good credit, bad credit, any credit” doesn’t fly anymore. It’s more like “good income, verifiable income, consistent income”!

During the boom years (2002-2006) income verification during the mortgage application process pretty much fell by the wayside. Lenders were not paying too much attention to where you made your money, how you made it and the likelihood of it continuing for the next three years. They simply looked at your credit score and “assumed” you’d be able to make the monthly payment. I know that is somewhat of an exaggeration, but that is the exact kind of mindset lenders had and in many cases the root of the current credit problem.

Now that enlightenment has reached everyone from Alan Greenspan to hedge fund accountants, lenders have finally accepted the fact that borrowers need to be able to make the monthly payment. This realization is turning lenders old fashioned grumps demanding to see proof that your employer exists, your check is real and that you indeed have a certain career stability. This means if you fill out a mortgage application today you will be asked detailed questions regarding your income and employment and depending on your exact situation the level of scrutiny can vary significantly.

For regular full time salaried borrowers receiving W2’s at the end of the year, the requirements are minimal. All you need to do is furnish a few recent pay-stubs and a copy of your most recent W2 and you’re essentially good to go. If you receive more than 25% of your income in the form of commission then you may need to furnish two years of tax returns. The clunker on these is any un-reimbursed employee expenses that reduced income. That can make your effective earnings lower and decrease the amount you can afford. Additionally, a decreasing commission income trend will also play a factor in the under writing decision.

Life is most difficult for the self employed borrower with the smart accountant. Don’t forget that self-employed also includes those who receive 1099 income as well – so its not just a business owner. Two years of personal tax returns is universally required in these cases but I am starting to see requests for two years of business tax returns as well. Of course, the tax returns always show a very low income and unfortunately there is very little that can be done to account for this lowered income. This is because the lender will make the loan decision on the taxable income – and in many cases the income is simply too low. There are some things which can be added back to the income but only very much. The five or six times I’ve gone through this process for a self employed borrower I haven’t been able to add a whole bunch back to their income.

As you can see, it’s a different world out there. It’s still very important to have good credit and all the other things like down payment, but income verification is increasingly more important. The only real way to make income less important in the credit evaluation process is to put more money down. If you are able to put 25% or more down then in many cases I’ve seen the income verification requirements reduced. However, not everyone is in a position to make a higher down payment.

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