If a lender thinks you may face payment shock after moving into your new home, that doesn’t automatically stop the loan going through. However, the underwriter is going to take this into consideration as best they can to see if there are other strong factors that will help mitigate the impact such as your cash reserves, i.e., how much liquidity you will have after the loan closes.
Income Reserves
Underwriters look at monthly expenses in relationship to income. Lenders like to see that buyers have liquidity (which is referred to as income reserves), in checking, savings, retirement funds, stocks or bonds. The number of months of reserves covering (PITIA) Principal, Interest, Taxes, Insurance, and Home Owners Association Dues where applicable, required will vary according to loan size and program. Your MLO will let you know the level of reserves required for the loan that you are seeking.
Common Income Issues
Conventional loans generally require at least two years of employment history to qualify. However, less than two years may be acceptable if the borrower's profile demonstrates “positive factors” to compensate for shorter income history. Those who are self-employed typically need to show no less than one year for the current business, and a minimum of two years in their industry.
Quality of Income
The number one quality lenders are looking for in a borrower, because lenders are responsible to prove the borrower's ability to repay, is consistency and level of income.
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