4 Things Lenders use to Underwrite Co-Buying Loans
There is a lot of confusion around how lenders qualify groups of people who are co-purchasing a home together. Working with an experienced mortgage provider can help you effectively navigate the process and make more informed and proactive decisions, but having an understanding of how underwriters look at different aspects of a loan application can give you a head start on securing the best possible loan to co-buy. Here are four key areas you will want to consider:
INCOME
Lenders look at a “debt-to-income (DTI) ratio” which is the percentage of the applicants’ qualifying income spent on housing expenses and other debts and obligations. Underwriters typically want the ratio to be no more than 43%, but some programs allow up to 50% (or higher). When applying for a loan as a co-purchaser, a lender will use the income from all the loan applicants combined to calculate a combined debt-to-income ratio. So even if one of the co-buyers has a lower income, another co-buyer's higher income can help offset the shortfall.
ASSETS
Underwriters typically look at all personal assets of the loan applicants on a combined basis. So it’s ok if some of your co-buyers have fewer funds available than others because the figures are looked at collectively, not individually. As long as the group shows enough liquid assets to cover the down payment, closing costs, and post-closing reserves (the cushion of funds required by the lender to be leftover after closing) then you’re good to go! Keep in mind that reserves might be required on any other properties that your Nestfriends own, so make sure your lender is calculating correctly.
DEBTS
Debts are also looked at collectively by lenders. When an underwriter calculates the debt-to-income (DTI) ratio, they are factoring in all expenses for the property being purchased along with the combined debts of all applicants on the loan. Keep in mind that debts do not include expenses such as utilities but do include items that show up on credit reports such as credit cards, student loans, car loans/leases, as well as expenses for other properties owned and any ongoing obligations such as alimony and child support payments. If the property being purchased is not a primary residence then an underwriter will also count the current housing expenses of all applicants regardless of whether they own or rent their current residence.
CREDIT
This is one area where all applicants need to meet minimum standards to be on the loan application. Underwriters look at two aspects of a credit report – the credit score and the activity.
Credit Score
Most programs have a minimum credit score that needs to be met by each applicant on the loan. This preferred score typically ranges from 620 to 720 depending on the program. A strong credit score for one applicant cannot typically offset a lower credit score for another. For example, if you have an applicant with an 800 credit score and another co-applicant with a 550 credit score, that loan will get denied if the person with the 550 credit score is on the loan.
Credit Activity
Underwriters also look at the amount of activity on your credit report. While there are exceptions to this rule of thumb, many programs require that each applicant have at least 3-4 accounts that have been open and active (meaning there have been charges and then subsequent payments made) for 12 to 24 months. Government loans (i.e. ones backed by Fannie Mae, Freddie Mac, FHA, VA, etc.) may have far less restrictive guidelines on the number of accounts you have, but others are more strict. One person not meeting the credit activity requirements will result in a loan declination for the entire group. There are niche programs that may help overcome this issue, they typically come with higher rates and other less attractive terms.
What Should You Do?
The best thing you can do is choose your mortgage provider wisely and avoid ones that don’t require you to provide paperwork upfront where you might identify these issues before you are in contract/escrow. A good mortgage partner will be able to work with you to identify any problem areas ahead of time and help you work around them. They can tell you which applicants should be on the loan and which may be better suited to be on title only and to avoid problems with your financing. The earlier you do this assessment, the better because it can affect whether you can qualify with your ideal list of co-buyers. The Nestfriends you choose to include can also affect the interest rates and other terms you might qualify for, which can raise the monthly payments for all parties. We recommend going through this with your Nestfriends early and working with a lender who can help you make the right decisions on who you should include on your loan application and lead you to a successful closing with the most advantageous terms possible.
About the Author:
Mark Maimon has closed more than $2 billion in total loan volume since entering the mortgage industry in 2002 and has been ranked among the top loan originators in the nation every year since 2006. Named a" Power Originator" and "Hot 100 Mortgage Professional" by Mortgage Professional America magazine, Mark regularly contributes to national publications, podcasts, and training for top real estate firms and financial organizations. Mark's bi-coastal team has a client roster that includes award-winning entertainers, professional athletes, high-net-worth individuals, real estate investors, first-time buyers, and everything in between. He also developed a national Bridge Loan program that services over 25,000 real estate agents nationwide.