Can you actually afford a house even if a lender denies you? Sometimes, yes. Here's why that happens and what's going on behind the scenes.

There are instances where a lender might deny somebody due to having too high of a debt to income ratio.

A lot of people might say "if the lender is denying you, then you definitely can't afford it."

The lender does go pretty high on their max allowable ratios. 49.99% is the highest debt to income they'll allow on a conventional loan. And that's on gross income, not net income.

So I can understand that statement, "if the lender won't approve you, you shouldn't get a house."

But it lacks a complete view. I wanted to point out the situations where someone might be able to afford it and still get denied.

The rules mortgage underwriters follow on how income is calculated, or how debts are measured, will affect this.

How Underwriters Can Undercount Your Income

Here are a few examples where your real income doesn't match what shows up on paper:

  • You or your partner have recently changed jobs and your pay structure changed. (Like going from salary to commission only, or from W2 to 1099)
  • You/partner don't have enough documented work history
  • You/partner are self employed and write a lot off
  • Child support/alimony doesn't have 6 months history, or is inconsistent
  • Part time second job has less than two years history

How Underwriters Can Overcount Your Debts

The other side of it is how underwriting treats debts.

  • High student loan balances. Even if they're deferred and you have a plan to wipe it out or maintain a low payment through an IDR plan, underwriting may still count up to 1% of the balance as a monthly debt.
  • Someone else pays the debt. They pay you, you pay the debt. Underwriting doesn't care. There's a way to omit that debt, but the person paying it should pay it directly for at least 12 months and should be on the loan too.
  • Collection accounts. Regardless if the collection was just or not, FHA underwriting will take the collection balance and assign a placeholder debt of 5% of the balance as a monthly debt (for balances that in aggregate total over $2k).

What To Do If This Is You

If any of this sounds like your situation, don't just assume you can't afford a home. The denial might be about how the numbers get calculated on paper, not about your real ability to pay.

Run your own numbers first. Our affordability calculator can give you a clearer picture of what you can actually handle before a lender's rules get involved.

And if you want to walk through your specific situation with me directly, you can grab a free planning session and we'll figure out what's fixable.

-Sam

Originally shared by u/SamTMortgageBroker in r/NewbHomebuyer — view the original thread.