What to do when you can’t document enough income for a mortgage

Once upon a time, back in olden days (before 2008), a borrower with income that they couldn’t document easily was no problem: they’d get a “stated income” loan, meaning that they could “state” their income, and the lender would accept their number without verifying it.

What could possibly go wrong?

It seems that, surprisingly, some borrowers were less than truthful with the income figures they wrote on their applications, and…well, you know how that story turned out.

Today, lenders are adamant about documenting every single penny of income an applicant claims. They want pay stubs covering a full month of income. They want transcripts from the IRS showing that the income the applicant claims is the amount they actually filed on their tax returns.

For self-employed borrowers, lenders are even more careful: a lady running a computer consulting business may claim mileage and entertainment so as to save on income taxes, but she then finds out that the lender looks only at her net income from her tax return—after she has taken full advantage of many write-offs.

There are couples who are buying a home, but only one is creditworthy. The spouse’s credit score is too low to qualify, even though there is plenty of income there. The money from that person who is not actually on the loan doesn’t count for qualifying.

Lenders look at a very important number in deciding whether an applicant is qualified. It is called the Debt to Income ratio, or “DTI.” This is the total of all debt payments (credit cards, car payments, student loans, etc.) plus the total house payment, expressed as a percentage of the borrower’s monthly income before taxes are taken out. A borrower who earns $6,000 per month whose house payment will be $2,000 month, with a $400 car payment would have a DTI of 40% (2,400/6,000). Lenders will allow a DTI as high as 45%.

What if the income a borrower can actually document isn’t high enough to qualify for the loan? This could be the case where someone receives substantial overtime income, but have only been receiving it for the past year. If they don’t have a record of receiving it for at least two years, the lender can’t use it for qualifying purposes.

You’ll be happy to know that there’s a solution to this common problem. It is called a “non-occupant co-borrower.” This is a person—usually a relative—who applies for the loan along with the person who’ll live in the property. The lender adds the second borrower’s income and liabilities to the application, to get the DTI down to an approvable level. Both individuals will be responsible for the loan, even though the parties agree that the occupant will be the one to make the payments. The second applicant may have plenty of income to help the primary borrower qualify, but their own debt payments—including their total house payment and any other monthly debt service—will be “blended” with the primary borrower’s numbers.

Both people will be on title, and both will be responsible for the mortgage. If the primary borrower were to default on the loan, the co-borrower would wind up with a black mark on their own credit report.

Co-borrowers are often concerned about two things: can they get off the title and off the loan, and will the new loan show up on their credit report?

The answers are: yes, no and yes. You’re welcome.

The co-borrower can sign a grant deed to take themselves off the title. They will still be on record as being one of the borrowers, because they will have signed the Deed of Trust—a matter of public record. The only way to relieve them of the responsibility for the loan would be for the primary borrower to refinance. Oftentimes, this can happen in a year or so. The new mortgage will show up on the co-borrower’s credit report as a liability. It could present a problem if they wanted to apply for a loan, since the credit report would show that monthly payment. The solution to this is to provide 12 canceled checks showing that the primary borrower had been making the payments.

The non-occupant co-borrower approach is obviously not suitable for everyone. But it can be a solution for those cases where a home buyer can’t document enough income to qualify, but can truly afford the payment. This kind of solution requires a great deal of trust on the part of the party who is sharing the legal responsibility for the mortgage. Many parents have been able to help their children become homeowners without simply making a gift.

This is what we would call a win-win solution.