Yesterday, I received the following text from a savvy agent we have worked with for years:
“I received an offer on a property and it’s ‘wife only,’ stating ‘husband is starting a business and that’s why he isn’t on the loan.’
I didn’t just fall off the turnip truck.
Does this mean the husband has bad credit and they are trying to qualify with just her, and is that an issue?”
This question made for great blog fodder, prompting a few reminders.
SWITCHING FROM W2 EMPLOYMENT TO 1099/SELF EMPLOYMENT REQUIRES TWO YEARS OF HISTORY
The husband in the above scenario could have stellar credit and likely does, but there is no reason to include him on the loan because the lender will not be able to use any of his income until he has a two year-history on his tax returns.
This is the case even if he has guaranteed contracts in place that will earn him $2 million this year. Newly self-employed borrowers need two years of income-history before lenders can use their income to help qualify for a loan.
In the above scenario where the husband just started his business in late 2019, lenders will not be able to use his income to qualify until he files his 2021 tax returns in early 2022 (close to 2.5 years after he started his business).
ONE YEAR OF TAX RETURNS – EXCEPTION FOR LONG ESTABLISHED BUSINESSES
Lenders can sometimes get by with only one year of tax returns from a self-employed borrower but that borrower needs to have been in business for at least five years. There are a few other exceptions too that I am omitting here because they seldom arise.
WHEN BORROWERS SHOULD DROP A SPOUSE/PARTNER FROM A LOAN
Borrowers should drop a spouse from the loan whenever debt ratios are tight and the hit from the other spouse’s monthly debt payments exceeds the benefit from the other spouse’s income.
If a spouse has no income and even small debt payments, he should not be on the loan at all if debt ratios are tight.
If a spouse has $3,000 of monthly income and $2,000 of monthly debt payments, he too should not be on the loan if debt ratios are tight because his debt burden offsets his income benefit.
DROPPING LOW-CREDIT SCORE SPOUSE
A spouse should also be dropped from the loan if he has a low credit score that is adversely impacting the interest rate and his income is not needed to help qualify. This is the case whether debt ratios are tight or not.
WHAT IF NO-INCOME SPOUSE HAS GREAT CREDIT, WON’T IT BENEFIT HIGH INCOME SPOUSE? NO
Most lenders correlate to the lowest credit score of all borrowers on a loan application.
So if a no-income/high-debt spouse has an 850 credit score while the high-income spouse has a 650 score, it does no good to add the no-income spouse to the loan.
FHA INCLUDES BOTH SPOUSES DEBTS NO MATTER WHAT
FHA requires that the debt service requirements of both spouses be included in the liabilities section on a loan application whether both spouses are on the loan or not.
If one spouse’s credit is particularly bad, it might still be beneficial to drop him from the loan but his debts will still be included.
As a final reminder, spouses can almost always be “on title” even if they are not on a loan. This is called a “title only” transaction, and it is relatively common.
“Title only” spouses can and need to be on purchase contracts if they want to be on title though.
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