Two dozen income red flags for home loan applicants

One of the major challenges in qualifying for a home mortgage is trying to determine what income streams a lender will approve when calculating a borrower’s debt-to-income ratio. Some sources of revenue are not allowed and others are questionable. Still others vary by lender.

In the spirit of making New Year’s lists, here are two dozen red flags that can go up with lenders when borrowers list certain revenue streams on a mortgage application. Perhaps it can help you in your application preparation and clarify expectations. The list was compiled by Mark Palmer, veteran mortgage lender at Guild Mortgage, and his staff.

1. The borrower is currently laid off or works in a position where layoffs are common. There are exceptions.
2. Child support has fewer than three years remaining. This can get complicated because of the typical clause “through college or age 22, whichever comes first” in agreements. Many lenders will not count child support if a child is 15 years old or older.
3. Child support with no court order. It’s possible to make it work, however, it’s rare.
4. Overtime pay becomes problematic when it declines year-over-year. Sometimes a five-year average can be included. However, if a VOE (Verification of Employment) shows overtime being phased out, it’s not going to be counted without some written explanation from the employer.
5. Second job or income stream has fewer than two years of history as being received by the borrower. This gets complicated as the first definition of a “year” is two tax returns filed.

6. Self-employment is fewer than two years. Can be overcome in some situations.
7. Rent income from a primary home being turned into a rental with little equity and/or no landlord experience.
8. Income is not taxable income. First thought is under-the-table income. However, there are other seemingly useable income streams such as stipends, educational grants, GI bill, which typically do not qualify.
9. Parents making monthly “expense” payment to a child for the child’s expenses. While very nice to have, not an income stream for loan purposes.
10. A veteran who will shortly be exiting the VA with no reenlistment or known civilian job.
11. Expense reimbursement even when it’s given every month and may not have any expenses against it. This can be overcome if there is an applicable expense yet specifics need to be in place.

12. Some Section 8 money, the government subsidy for rental housing. This has been modified over the years. Some Section 8 money disappears when the applicant purchases a home.
13. Housing allowances vary greatly. Generally not allowed for student purposes. VA housing allowance and ministerial parsonage allowance generally allowed (with proof from church board).
14. Money from loans.
15. Commission income with fewer than two years of history.
16. Commission income from a change of job with fewer than two years of history. This can vary by job and the person.
17. Unsecured loans where the borrower is the beneficiary of the payment with less than 12 months history and/or no contract. The contract or note should be standard and enforceable and a properly recorded document.

18. Contract income that you cannot prove payments received or is seldom made. For example, a single annual payment with less than two years payments made and filed on tax return. There are allowable possibilities.
19. Tips not showing on the tax return and/or with less than a two-year history.
20. Seasonal income with a less than a two-year history and/or not filed on tax return. Christmas tree sales, fireworks stands, Alaska commercial fisherman, car sales without a dealer’s license are some examples.
21. Annuity income that has fewer than three years remaining.
22. Trust fund income that has fewer than three years remaining.
23. One-time bonus or less than two year history of bonus. Still works for savings, just not income.
24. Last but not least . . . Marijuana sales from a state where it is not legal and/or borrower does not have a proper license. Let’s assume they also did not file on their tax returns. A police report does not count.

Be prepared for your next mortgage application. Know what cash will count and what funds will not.

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