Ask the Underwriter is a regular column for HousingWire's new LendingLife newsletter,addressing real questions asked to, and answered by, professional mortgage underwriter, Dani Hernandez.
Here's the setup:
My borrowers are a married couple who want to refinancing their mortgage using a conventional loan. They are both on the mortgage that is being refinanced and would both like to be on the new loan. The husband is self-employed and their joint tax returns show him as having negative self-employment income and he isn’t keen on providing the business tax returns. When I combine his negative income with her positive salaried income, the DTI is over 50%. The wife makes enough money to qualify for the loan on her own but they are insistent about both being on the new mortgage.
Is there a way to keep them both on the loan without having to count his negative self-employment income against their DTI?
The secret to keeping them both on the loan and excluding his negative income is to put the wife first (this is a lesson most husbands learn early on so it shouldn’t be a problem)! List the wife as the primary borrower on the application and the husband as the co-borrower. Fannie Mae allows you to exclude a self-employed co-borrower’s income or loss if you choose and also forgo providing business tax returns if that income is not being used to qualify for the loan.
Fannie Mae’s Guidelines:
When co-borrower income that is derived from self-employment is not being used for qualifying purposes, the lender is not required to document or evaluate the co-borrower’s self-employment income (or loss). Any business debt on which the borrower is personally obligated must be included in the total monthly obligations when calculating the debt-to-income ratio.
If the husband was the primary borrower on the loan, he would have to provide business tax returns and qualify for the loan with the loss. But as the co-borrower, that entire loss disappears and no further documentation is needed. How awesome is that?!
Here's what this looks like translated to numbers…
Primary Borrower: SE Income = -$5,000/month
Co-Borrower: Income = $10,000/month
Total Qualifying Income = $5,000/month
Primary Borrower: Income = $10,000/month
Co-Borrower: SE Income = -$5,000/month
Total Qualifying Income = $10,000/month
By switching the primary borrower and the co-borrower, their qualifying monthly income doubles and so does the maximum loan amount that they qualify for!