I received a call from an old Realtor buddy. Actually, he's not that old, I've just known him for a long time. He was, to say the least, perturbed that his buyer's lender wouldn't qualify him due to his lack of income. It wasn't the lack of income it was the fact that the lender wouldn't use his income to qualify him. I asked him why his client didn't turn around and apply for a "no income" loan? He said he tried to but his client hadn't been in business long enough. "What gives?" he said.
His client had gone to a loan officer that didn't properly structure his loan, that's what happened. Apparently the buyer knew he had an income issue and told the loan officer about it, but the loan officer submitted the client under a "stated" income loan. A "stated" loan means the lender will use whatever income the borrower puts on the loan application for purposes of calculating debt ratios. If the borrower put down $10,000 dollars per month, then that's what the lender would use for a ratio calculation.
That wasn't the problem. The problem was that the lender couldn't use the income because the lender required there be a solid two-year history of self-employment before that income could be used. The buyer had only been self-employed for less than 12 months, far less than the 24-month requirement. Sure, the guy was doing okay and making good money. It's just that the 2-year requirement wasn't met. Nothing the buyer could do to change that.
The same thing happened when the buyer tried to go "no income" on his subsequent loan application. The two year requirement still stood and the loan officer did nothing more than waste everyone's time.
Many "stated" or "no" income loans have other restrictive guidelines that lenders can use to help offset the apparent risk of not verifying income. Most often such a loan is used because while there might be income to qualify for the mortgage but the lender won't count it. Usually that killer requirement is that the borrower be in the same line of work or on the same job for two years.
An attorney fresh out of law school who started her own practice might very well be billing $50,000 per month. But having only been in practice for six months can be a problem for many lenders. "Stated" and "No" income loans can have any additional requirement they want to help the lender sleep at night.
There are programs that won't have a requirement to be on the job for two years, but then one can expect other offsetting items the buyer must adhere to, most often more down payment, a higher rate, better credit or any combination of the three.
But the loan officer made a big mistake. Just because a loan has a "Stated Income" feature it doesn't mean the lender doesn't look at other features of the loan to help them come to an educated lending decision. The loan officer thought that all one has to do is put down how much money the borrower made and that was that. Too often lenders will come up with a new loan program with a different feature only to add others they don't quite tell you about. But it's not the consumer's job to find that out on his or her own. It's the job of the loan officer to find out the details of the loan before anything at all happens. If it does, it's just a waste of everyone's valuable time.
