Mortgage Lending: It’s a History Lesson

When a mortgage underwriter reviews customers' credit profiles and income histories, what's happened in the past two years holds a lot of weight as to what their future will be.  And what the future may hold for them doesn't always count for much at all. At least when assessing risk in mortgage lending. 

If your future is difficult to substantiate, your past history is what a mortgage underwriter considers.  That's why it can be difficult these days for newly self-employed people to obtain loans.  If you start a new business, you have no track record.  Couple this fact with the other odds reflecting it's highly likely you'll lose money your first year in business, and you can see why you have to be out of the gate two years before you're not considered a risk anymore.

The history theory is also a hard lesson for people who earn tips as a large part of their income to learn   A lender will ask these individuals what Uncle Sam has on record for their earnings for the last two years.  There's no way to soundly document what they've earned year to date, except for base pay and their two year history.  So, if they're making a ton of more money in their third year of business, typically a lender can't substantiate the marked difference in income.  The same can be said for people who are self employed and have multiple business expense and depreciation deductions.  Lenders count the bottom line when the dust settles.  And again, a lender can't look at year to date earnings to offset what's on historical record.  Year to date earnings might strengthen your profile, but basically, it is what it is. 

Of course, your credit score is a reflection of your past.  It's a great indicator of what your future will be.  I guess that's pretty self explanatory when you think in terms of lending.  Statistics prove that this number pretty much tells a lender how likely it is you'll pay on time in the future.  It's a good crystal ball, in general.  So if you have an iffy credit score, you need to work to improve it, and reapply for a mortgage in the future.

Sometimes a lender can look to the future, and it's to your advantage.  For instance, if you have a debt, like a car payment, that will be completely satisfied in 10 months or less, it won't count against you when calculating your monthly debt.  The same can be said for child support or alimony that's about to expire (or at least the legal obligation is about to expire). Likewise, certain payments sometimes won't count if they're deferred for a couple of years, like student loans.  In addition, generally, a person can just have started a salary job and provide a pay stub after loan closing.  However, some programs may be more stringent than others where these areas are concerned.

You see, a lender is going to always count what can be verified, not what the future will hold - no matter how rosy it appears.  And most programs these days would require that an applicant be prepared to verify the information, even if the underwriter doesn't ask for it.  So, be informed when you consider buying a house.  Your credit history can mean the difference between an A+ and a C- in your interest rate secured and ability to obtain a loan.