Solution 3: Document Compensating Factors

Income is defined by mortgage lenders as stable monthly income; that is, income that can be documented for two previous years and can reasonably be expected to continue without interruption. Income that does not meet these strict guidelines, such as the income mentioned in solution 2, may not be usable in calculating ratios, but it can be used as compensating factors allowing your lender to accept your application.

• Probability of increased earnings – This is a strong compensating factor if you happen to be a recent graduate and in a profession such as a lawyer, dentist, or physician. You can present earnings data of other professionals in your field to argue for favorable consideration.

• Spotless credit – If you have exemplary credit and you carry a heavy debt load, you can argue that you manage your financial affairs in a competent manner and that you will continue to do so when you own your own home. This argument is particularly strong if your overall monthly expenses will be about the same once you are in the house (i.e., your present housing expense is approximately the same as the proposed housing expense).

• The tax advantages of home ownership – Even if your overall housing expense increases with the new mortgage, argue that this increase is offset by the deductibility of mortgage interest for federal (and most states) income taxes. This is especially true for borrowers in higher tax brackets. When you factor income-tax savings, your overall housing expenses may be lower than what you are now paying if you are renting a house!

Solution 4: Get a Cosigner

Some lenders relax their income qualification ratios if your rich uncle agrees to cosign (guarantee) your loan, for example. Without a cosigner, a lender may require that your monthly payment be less than 28 percent of your monthly income; with a wealthy cosigner, the lender may allow the monthly payment to be as much as 35 percent of your income and your debts 43 percent of your income. However, as a cosigner, your “rich uncle” is required to go through all the processing and income verification hassles required for loan approval. You may not want to put your cosigner through that process. In addition, all the cosigner's debts are included in the ratios, so be sure that the additional debt is more than offset by the additional income before you bring the cosigner into the transaction.

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