When you apply for a mortgage, you have to disclose your income. Every mortgage program requires this today – the days of the stated income loan are gone. What happens if you don’t make enough money, though? Are you going to be unable to get a mortgage?
Luckily, there are ways around it. While you have to be able to prove that you can afford the mortgage, it’s not all about your annual salary. It’s about the big picture. It’s time to strengthen your other factors to make them look as strong as possible. But you may also have to increase your income at some point as well. We look at all angles of the process below.
Have Great Credit
First of all, you need great credit or you aren’t going to have a leg to stand on with a lender. If you want to argue that you can afford a loan even if your income doesn’t seem high enough, you need to prove that you have a good track record.
Lenders look at your credit history for your track record. They look to see how well you pay your bills and how far you stretch your finances. Are you in over your head in debt or do you pay your credit card bills off each month? Do you pay your bills on time or do you pay them late? These are the thing lenders are going to look at when they decide if you are a good risk.
In fact, your credit score is one of the first things lenders see. Consider it your first impression for the lender. Without a good first impression, you could end up without the loan you need.
Lower Your Debt Ratio
If you apply for a loan when you are already in over your head in debt, chances are your low income isn’t going to help matters. Make sure that your debt is in line with the amount of money you make. If you want a general guideline, use the conforming loan guidelines. They require a 28% housing ratio and a 36% total debt ratio.
If you calculate your debt ratio, which is your total debt divided by your gross monthly income and it greatly exceeds 36%, you need to pay some bills off first. Lenders are not going to consider giving you another debt if you are already in over your head. If you have lower income, you’ll want lower debts too. It will open up more room in your debt ratio for a mortgage payment as well as increase your chances of approval.
Try Different Loan Programs
No two loan programs have the same requirements. If, for example, you don’t make enough money to qualify for a conventional loan, consider a government-backed loan. FHA loans have some of the most flexible guidelines and anyone can qualify. If you are a veteran, you also have the good fortune of applying for the VA loan, which allows 100% financing with flexible guidelines.
If you can’t find a loan program that you can qualify for, you can also try a subprime loan. This requires thinking outside of the box. It’s time to get creative! Subprime lenders have their own rules, which are sometimes more forgiving than what conventional or government-backed lenders require. This is because there aren’t any investors that the lender needs to answer to –the lender is the investor. If they want to take a chance on your loan, they can.
Add a Co-Borrower to the Loan
If your income truly leaves you without any options, you can try adding an occupant or non-occupant co-borrower to the loan. The co-borrower helps you qualify for the loan by using their income alongside yours. This may help lower your debt ratio and give you access to more loans.
Keep in mind, though, if you use a co-borrower’s income, you also have to use his/her credit and debts. Lenders usually take the lowest credit score out of the two borrowers for loan qualification purposes. If your co-borrower has a worse credit score than you, it could hurt your chances of loan approval, even if he/she makes more money.
The co-borrower will also be responsible for your mortgage if you stop making payments. This isn’t a decision to enter into lightly. Make sure everyone is on the same page and understands what is at risk. If you stop making your payments, your co-borrower’s credit can suffer too, which can make for a sticky situation between the two of you.
Get Compensating Factors
Remember that lenders look at the big picture when qualifying you for a loan. They don’t look strictly at your credit score or strictly at your income. They take all of the pieces of the puzzle and put them together to see what type of risk you pose.
If your income is lower than the lender would like, but you have a great credit score, low debt ratio, and stable employment, you may be a good risk. On the flip side, if you have high income, but a low credit score and high debt ratio, you may be a high risk.
It’s not all about how much money you make when it comes to qualifying for a loan. Of course, your income plays a role and the more you make the better your chances of approval. But, you also need to show that all aspects of your loan application are strong in order to qualify.Click to See the Latest Mortgage Rates»