You put your heart and soul into a new home purchase.  Buying a home is one of the most important transactions of your lifetime. In some cases it takes all of your resources, your hard-earned savings, and your retirement account. You’ve probably mentally moved into your new home months before it actually happens. You’ve decorated and planned holidays and social events around it.

When you began the process everything probably looked good on paper, and even though your agent and loan broker warned you it was tight, they also said you would most likely still qualify. And then you get the dreaded letter or phone call from your loan broker, and it’s not good news: the bank has said you don’t qualify.

Time to Regroup

The first thing you should do is find out the specific reasons why you weren’t qualified. Was it income, credit, or a lack of assets? Sometimes it’s easy to feel like the bank or lender is plotting against you, but in reality banks and lenders don’t make money unless they close loans. You just have to jump back in the ring with a different strategy.

Income Alternatives

One of the most common reasons for loan declines is low income. Lenders operate under strict guidelines set by Fannie Mae which is the government backed entity that sets the rules for home loan approvals. Here are some sources of possible income adjustments to help you qualify:

1. Depreciation Expense: When you’re a self employed borrower you document your income with a schedule from your federal tax return called schedule C. This form shows the income and expenses for the tax year, and lenders use the net profit, not gross sales, to determine your annual income. Many schedule C’s include a line-item for depreciation expense. This deduction is taken when you own a lot of machinery and equipment or real estate in your business. Federal guidelines permit this expense to be added back to income to boost your company’s profit. For example, if your schedule C shows a net profit of $50,000, but includes an expense deduction of $10,000 for depreciation, you are allowed to add this back to profit, which would actually give you a profit for loan purposes of $60,000 ($50,000 plus $10,000.)
2. Gross-Up your Retirement Income: If you’re relying on a fixed income to qualify, such as social security or government pension, lenders will allow you to multiply, or gross-up your income by as much as 25 percent to give you a larger qualifying income. For example, on a conventional loan, this factor is 25 percent. If you and your spouse’s current monthly income is $2,000, you can multiply this by 125 percent to arrive at a new qualifying income of $2,500 ($2,000 times 1.25 percent.) This additional $500 per month might be enough to allow you to qualify.
3. Future Employment Contracts: Certain occupations such as lawyers or doctors, come out of school with little prior work history but great potential future earnings. Some lenders will permit the inclusion of an employment contract that stipulates what the expected future earnings will be. This applies to doctors, lawyers, CPA’s and engineers. A letter from a new employer that details the expected future compensation may also be allowable. Some lenders even have special loans designed exclusively for professionals who have just graduated from school in a well established profession.

Consider a Co-signer

If you’re trying to purchase a home using conventional financing, a co-signer must also plan on living in the residence as an owner-occupant. However, if you use FHA finance, a cosigner does not have to live on the property. They are considered a non-occupant co-signer. Today there isn’t much difference between an FHA and Conventional loan, other than Mortgage Insurance which is required on all FHA loans regardless of the amount of down payment. However, since many first time home buyers put less than 20 percent down, they’ll still have mortgage insurance even on a conventional loan. A co-signer will have to provide the same documentation you provide as a primary borrower and this includes their own house payment and personal credit obligations.

Make a Larger Down Payment

While this is easier said than done, consider taking out a loan on your 401-K to boost your down payment. You should contact your financial advisor for the details. Some plans allow you to make a one-time withdrawal for a home purchase without a penalty.

Sellers Usually Don’t Want to Start Over

As long as you’re a legitimate buyer with a good job and reasonable assets, most sellers will want to work with you, even if you have to re-apply with a new lender or change your loan program. This is because staring over with a new buyer can take considerable time and effort. If you get a decline letter, don’t panic, circle the wagons, and try a different approach.