Loan companies and banks, the ones who lend the money, look at three things to determine who they will lend money to and under what terms.
1) They look at your income. They determine your income by looking at your tax returns. If you have income that is not reported on your tax returns, then that money is “not counted” by the lenders. Lenders don’t report you to the IRS and they don’t care if you pay taxes or not, what they care about is the “documentation” of your income, because the people who lend the money, the actual investors who provide the funds that you use to purchase your home, want assurance, or a least a high degree of confidence, that the person borrowing the money will be able to pay it back, and the way they make that determination is based on your tax returns for the last two years. They want to see exactly how much money you made and who you worked for, and what sorts of revenue streams you have coming in, and they use that information to determine how likely you are to be able to pay back the mortgage amount, month after month for the for as long as you might own the house. If you get paid “under the table” even if you put the money in your bank account, it makes no difference to the lender, they don’t count it as income unless it shows up on your tax return. If you run a home business and you get paid in cash, you are still expected to file a tax return showing how much money you earn from one quarter to the next. How much you pay in taxes is not what the lenders care about, they look at the total earnings, not how much you pay in taxes to determine how much they will lend you.
2) The second thing lenders look at is your overall money in the bank and how it got there. Lenders want to know how much money you have and where the money you have in the bank came from. If you have been saving it, then lenders want to see the deposit slips showing that you made regular deposits into your account that added up to the amount of the down payment. Let’s say your down payment is 3.5% of the purchase price, and you are buying a $200,000 home. Then your down payment would be about $7000. Lenders want to know, how did you get the $7000 you are using as your down payment. If you saved it up over the course of a year or two years, they want to see deposit slips from your bank showing that made deposits once every two weeks or every month reflecting savings from your income. If you got the money from some other source, like a family member, or even from the sale of a car or some personal property, then they want to see the receipts showing when you received the money and how much of it you put in the bank. What the lender wants to know, is, of course, that you acquired the money legally, and don’t owe the IRS money. Also, the lender wants to make sure that where ever you got the money, from a friend or family member, that person does not have some sort of extra-legal relationship with you. For example, if you borrowed the money for a down payment from a family member and the family member expects you to pay them back, then of course, you would be expected to pay them back in addition to the loan payment, and that might be more than you can afford, and the lenders know, family always get paid back first. If things get difficult, you will stop paying the bank before you stop paying back a family member, and for that reason, your lender will not allow you get the down payment from family members unless it is certified by that family member to be a “gift” which means you are not expected to ever pay it back. The lender will seek documentation to prove exactly how you came about having the money for you down payment.
3) The lender will look at your credit score. A credit score is a compilation of all the things you do that don’t involve cash transactions. It includes you credit cards and car loans, any other loans you might have, and how much money you earn and spend every month that can be tracked from debit cards to lease information regarding any items you pay off over time. It can even include your PGE bill or telephone records. If there have been late payments or delinquencies, or a financial judgment against you from a court and that is on your record, the credit service has that information and they use that information to come up with a “credit score” which is just a number that tells the lender how well you have done in the past in paying off any debts you might have incurred, as well as keeping a record of any debts you might being paying off in addition to the new debt you are applying for with loan.
The lender looks at all three of these measures of your credit worthiness before they make the decision to lend or not lend you the money.
I have a lender that could assist you in navigating this terrain. She is very helpful and can guide you to the right decision regarding ways to improve your credit worthiness. Her name is Schan Delle Nettles and her phone number is 530 271-3748. Give her a call, mention my name. She will help you out.