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Going Beyond Underwriting Guidelines

What Do Lenders Look at to Get a Loan Approval?

Beyond Guidelines

Understanding what lenders are looking for in the documentation you provide when trying to qualify for a home mortgage and how they will make their decision can help remove some of the uncertainty as you prepare for a new home purchase or refinance.

Lenders are aided in making their decisions for approval or denial by using general underwriting guidelines and standardized rules when reviewing Income, Assets and Credit.

These underwriting guidelines generally provide more guidance on what a lender cannot do as opposed to what the lender can do and would apply to the more traditional types of financing (Conventional, FHA, VA, USDA…).

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Even though these guidelines provide a specific set of rules for lending purposes, every possible scenario cannot be accounted for so there is much room for debate when an unusual set of circumstance present themselves.

Having a partner with experience and creativity can prove to be the difference in obtaining the financing terms you are looking for. The three main categories we will review are as follows: Income, Assets and Credit.


Items Collected:

  • The most recent two years personal and business Federal Tax Returns
  • Year to Date Profit and Loss Statement and Balance Sheet (Self-Employed Borrowers)
  • The most recent two years W2’s (for Standard Employment Income)
  • 30 Days Current Pay Stubs

When a lender reviews your income documentation, they are trying to identify what portions of your income are reliable (stable) and will likely continue for at least the next three years. This review will be different when looking at standard employment income and self-employed income.

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For standard employment income, the lender will generally review the previous two years W2’s and most recent 30 days of pay stubs to help guide in what income can be used for qualifying. This will be supplemented by a verification of employment form completed by the employer.

There are many types of income that can appear on an individual’s pay stubs. Some examples are base earnings, overtime, bonus income and commission income. Pay stubs will also be reviewed for any deductions that may represent a debt or obligation not reflected on the credit report (such as a child support deduction or employer loan repayment).

The lender will review the base earnings to determine if they are consistent of full time employment. If less than full time, they may look to document if there is a minimum number of guaranteed hours per week or may average the earnings over a period of time.

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If the lender is looking to average the income due to inconsistent patterns of earnings, further clarification may be required from the borrower and the employer to make sure the lender is giving as much credit as possible to the qualifying income.

Overtime, Bonus and commission income are considered “Variable” income. In order for this type of income to be considered, the lender will answer the stable and continuance question by reviewing the history of receipt for each individual category as well as the year to date information. This information is generally provided on the verification of employment form completed by the employer.

Each category of variable income will be reviewed individually. The income should have been received over the past two years and continue into the current year. The lender will be looking at the previous earnings record and year to date earnings to look for consistency and to confirm that the category of income is not declining.

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If all is well, the previous two years earnings would be averaged over 24 months to provide the income figure to use in qualifying. If the trend is continually increasing, they may choose to average the income over the entire period of time being reviewed.

Self-Employed individuals go through a similar process in reviewing variable types of income. The documents to be reviewed will be the personal and business tax returns as well as a Year to Date profit and loss statement and balance sheet. In general, for a self-employed borrower who files only personal tax returns, the schedule C income will be reviewed and averaged over the previous two years.

The Year to Date profit and loss statement would be used to confirm there is not decline in the most recent earnings of the business. Recent changes to the underwriting guidance received by lenders may allow the review of the most recent year earnings supported by the profit and loss statement and balance sheet, but this will be on a case by case basis.

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The income to be used generally will be the Net Earnings reported to the IRS with a few expenses allowed to be added back in. The expenses that would be allowed back in would be items such as Depreciation, Depletion and business miles deductions. The business use of home deduction would be allowed to be added back in on Conventional financing but not FHA.

The lender will also be reviewing the filed tax returns for both self-employed and standard employment to confirm that all federal taxes previously owed have been paid. If the filed tax returns reflect an amount due to the IRS, the lender will generally ask for proof of the cleared payment.


Items Collected:

  • Most Recent Two Months Bank Statements or Most Recent Quarterly Statement

When reviewing bank statements, the lender will be looking for any large deposits that cannot be readily identified on what generated the income for the deposit. The general guidance for lenders is to review deposits that exceed 25% of the qualifying income used in underwriting on FHA loans or 50% of the qualifying income that is used for qualifying on conventional loans. It is important to note that the assigned underwriter is allowed to question any deposit they may be concerned with.

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The documentation necessary to address any questioned deposit is generally a copy of the check that was deposited obtained from the bank account in question along with an explanation for the deposit. Additional documentation may be required depending on the source of the deposit.

An example would be if the deposit is related to the sale of an auto the underwriter may request copies of the check, copy of the Bill of Sale and a copy of the DMV transfer documents (the check should be drawn on the account of the person identified on the Bill of Sale and DMV documents).

The lender will also be looking through the debits on the bank statement to identify if there may be any undisclosed debt payments not reflected on the credit report.

Some acceptable sources for money used in the purchase or refinance of a home would include personal savings or checking accounts, retirement funds, stocks and bond funds and gift funds from a family member.

If the funds to be used in the mortgage loan are coming from retirement funds or stock and bond fund accounts, be prepared to paper-trail the withdraw of those funds from the account where the funds are obtained from and show the deposit of those funds into your personal accounts.

If you will be using gift funds from a family member, be sure to advise your loan officer of your intent to do so and the amount of the gift you are to receive. Do not accept or deposit the gift in advance if at all possible.

You and the donor will complete a gift letter, provide a current bank statement from the donor evidencing they have the money to give, and the donor will wire the gift directly to escrow at a later date. The gift amount identified on the gift letter must match the amount eventually wired to escrow.

Do not be concerned if the gift amount sent to escrow causes the total amounts received by escrow to exceed your actual closing costs. Any amounts not needed for closing will be returned to you by escrow once the transaction has officially closed.


Items Collected:

  • Signed Borrowers Certification and Authorization form (provided by the lender)
  • Clear Copies of Driver License and Social Security Cards
  • Mortgage Coupons/HOA Payment Coupons for any Mortgage Loans currently in place
  • Homeowners Insurance Policies for any Mortgage Loans currently in place
  • Property Tax Bills for any Mortgage Loans currently in place

Your lender will request a Tri-Merge credit report when reviewing your request for a home loan. This is a report which consolidates information from three credit bureaus and provides the credit score reported by each bureau. The three bureaus generally used are Experian, Trans-Union and Equifax.

If all three scores are present, the lender will use the middle score reported as the qualifying credit score. If only two scores are reported, the lender will used the lower of the two as the qualifying credit score. If only one score is reported that score is used. Individuals without any credit score would have additional non-traditional credit score requirements and may have more restrictive underwriting requirements.

The lowest qualifying credit score of any borrower who is being used on the financing will be the score used for underwriting and pricing.

The credit report will also be reviewed for any significant derogatory credit events such as Collection Accounts, Charge-Offs, Judgements, Tax Liens, Bankruptcies, Short Sales or Foreclosures.

Lenders have specific waiting periods that must be applied for Bankruptcies, Short Sales and Foreclosures before a loan approval can be issued for any traditional financing. Judgements and Tax Liens will generally have to be paid in full in order to obtain approval (this can be done through the mortgage loan as an additional closing cost. Paying these items through escrow during the transaction can prevent delays in obtaining proof of payoff if paid outside of escrow).

Collection accounts and charge off accounts generally do not have to be paid off to obtain a home loan, but the presence of these accounts may require that the lender assign an assumed monthly payment towards these accounts when establishing the overall debt to ratio qualification of the mortgage. Medical collection accounts are generally ignored.

The lender will also be reviewing the credit report for disputed trade accounts. When a trade account is disputed by a consumer with the credit bureaus, the credit bureau will report that the accuracy of the information on that trade line is in dispute and will remove that trade line from consideration when establishing the credit score reported by that bureau.

That can cause the score reflected by that bureau on the credit report to be unreliable. It is possible that you may need to remove a dispute associated with a particular trade line and re-run the credit report to reflect that the dispute has been removed in order to have a valid credit score for the lender to consider.

The credit report will also reflect the recent inquiries made by the individual over the past 12 months. The lender will request a letter explain the nature and outcome of each inquiry reflected on the credit report. What they are looking to confirm is that there are no undisclosed debts for accounts that have been opened which have not had the opportunity to report as an active trade line on the credit report itself.

About the Author

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • chas90210 says:

    What items on Schedule C does a lender credit back to your income for qualifying for a VA loan? I’ve read that depreciation and other items will be added back to the borrowers income and not treated as an “expense”

    • Scott Schang says:

      Hi Chas,

      Depreciation and depletion are the easy ones. One time losses can potentially be added back in. Mileage or auto expenses that are paid from a business account can sometimes be added back in. These days, there are very intricate calculators/worksheets that the underwriter will enter in all of the lines items from the schedule C and it will punch out the usable income.

      If you would like an introduction to a VA loan expert in your State, shoot me an email to Scott@findmywayhome.com and I’ll see if I can help.