Income Reserves
When you are living paycheck-to-paycheck due to lifestyle choices, it is going to be hard to get approved for a loan, even if you have a high income. Underwriters look at monthly expenses, not simply yearly projected income. Lenders like to see that buyers have money in savings (which is referred to as income reserves), ideally three to six months worth of expenses. If the borrower has little to no savings, he or she is a high- risk borrower, and it is going to be more difficult to get the loan approved. It may not squelch the deal, but it can be an underwriting issue. Certainly, the underwriting team will scrutinize other parts of the loan more closely. For example, if you have low income reserves, the lender will review what type of assets you have, the size of the down payment, and the source of your funds. They may find that the lack of savings is a negligible risk, or they may find that the borrower is barely scraping by, despite making a large salary. That’s a huge red flag that could easily kill a deal.
COMMON INCOME ISSUES
A good lender is not going to merely check to see that a potential borrower is employed at the moment and leave it at that. A good lender will instead look at the entire income history of a borrower to see if there are any trends that would point to risk. One of the most common income issues is gaps in employment. If a borrower has a history of being unemployed for a few months every few years, that’s a huge red flag. If the borrower leaves jobs quickly without having another job prepared to enter soon afterward, it is likely that they will continue that trend after they sign the mortgage. That is a major risk for the lender.
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