Buying Real Estate Without A Source of Income Or When You Are Changing Careers

I've found several of your mortgage articles very helpful, and wondered if you could help me find a way to solve the dilemma I've been presented with by a loan officer at my bank. My husband is Active Duty DELETED, and is getting out in August of this year. We've found a house we want to buy in the state we'll be moving to, but when I went to the bank I was told no lender would touch him with less than a year in the service and no promise in writing of a job in DELETED. He doesn't have any credit history, but mine is fair (I haven't seen my FICO score recently but I do believe it to be over or around 620). I can provide w2s, income tax records, rental history (never a late payment), etc, but I cannot provide proof of the future. Is it true that we're simply out of luck? Where should I turn from here? I'd be very grateful for any information you can provide to me or post on your website, so far this seems to be a unique dilemma...

You have run smack into the question at the heart of every loan: How are you going to pay the money back?

This is understandably a cause for concern for the lenders. They don't want to make loans that aren't going to be paid back, and in order to pay them back, you've got to have or be able to get money from somewhere

What they are looking for is a regular source of income, and you don't apparently have one. You're not going to keep the one you have, and you haven't got a new one.

Now there are loans for people in such situations. They're called NINA or No Ratio loans, because there is no income stated or verified, and no debt to income ratio. However, these loans have lower allowable loan to value ratios (100% financing is tough to find for NINA loans, especially now, and I always did think it was a little over the top) and the rates are higher than full documentation or stated income. Full documentation shows that you have had and are likely to keep a good stable source of income, and documents that you've made enough in the last two years. Stated Income shows that you at least have had the same stable source of income for two years, and usually that you have some money in the bank. NINA loans are driven purely off the Loan to Value situation and your credit score. You are essentially telling the bank, "Here I am! Gotta love me!" You are not providing any kind of documentation that you are able to repay the loan.

Your husband's lack of credit history and the fact that your score is only about 620 do not help. There is no evidence in your email that you are working outside the home.

Now I understand how tempting it is, especially right now, to buy a home. The two of you are getting out and looking to start your post-military life together, and you want to move right in to your new home, and start your new lives all at once.

This is, unfortunately, the kind of desire that quite often leads to disaster. Have you considered what happens if you don't get work? What if you do get it, but delayed several months? Or what if they keep promising to hire you in a few months but it just never quite happens? Meanwhile, that mortgage have to be paid, and you're not likely to be able to pay them working fast food. Meanwhile, the fact that you have this house is tying you to that location and its commuting area, where maybe you could find something that would support your family if you were able to move.

The fact is that buying real estate is something to do when you're certain you are stable enough to make those payments - as in you already have the money coming in, or solid reason to believe it will be coming in. A written offer of employment might be such reason - it isn't always. Cousin Bob saying, "Sure, we'll take you on!" isn't. Even though he's family, Cousin Bob needs to feed his own kids before he feeds you. Friends, old military buddies, former employers - I've seen more than enough examples of people who thought they had a job but didn't than you'd care to know about. You might have a job when they're willing to promise it in writing - they can be held responsible for that in court if they fail to follow through. If they haven't given you such a written guarantee, there is a reason why they haven't.

The one thing that messes up your entire financial situation, for now and for the next several years, worse than anything else is failing to pay a real estate loan on time. I have seen credit scores drop by 150 points for one thirty day late payment. If it gets to the point of a notice of default, or foreclosure, the consequences last for years. Plus you still owe the money, even though you haven't got it.

Once upon a time I wrote an article called, "When You Should Not Buy Real Estate." You fall into the third category I mention, those without a sufficiently stable income. You might also fall into the insufficient time to benefit category. As much as I like putting people into houses and such, the fact of the matter is that you buying a property right now would be very likely to mess you up financially for a very long time. Move into a rental for a little while, unpleasant as it may be. That way, if you have to change your plan, you are free to pick and leave if you need to. Having a property ties you to it and it to your wallet until it is satisfactorily disposed of, something hard to arrange on good terms right now in large portions of the country. On a $500,000 property like most around here, you are risking $500,000. With purchase money loans, there are limits on your liability and the lender's ability to get a deficiency judgment in most states. Nonetheless, to go into a house purchase with the idea of sticking the lender for the difference if it doesn't work out is at least a close cousin to fraud - and it might be fraud itself. This sort of thinking is one of the primary reasons behind the bubble in many parts of the country - and is false to boot. One way or another, you will almost certainly pay for a lender's loss. Since I'm presuming you don't want to do that, better to just not do this until you are a little more stable.

If you could afford to pay cash, this would not be a concern. But if you could afford to pay cash, the loan would not be a stumbling point. Also, some folks might ask, "what if I can make the payments off of a minimum wage job?" which is not the case anywhere in California. To be fair, this does change matters, but be careful that minimum wage jobs are obtainable in your area. If there's 26% unemployment except for four weeks per year, you may not be able to get a minimum wage job, even if you've got the time for it. Furthermore, be careful that you're not biting off more in property taxes than you can chew. California's property taxes are comparatively low. ratewise, which is one reason why clueless renters come here from other states and think, "Wow, they're only paying $4000 per year on a $400,000 property!" and think there's plenty of room to raise property taxes. But somebody making California's minimum wage of $7.25 makes $14,500 - and $4000 is over 27% of that person's gross wages. Senior citizens will lose their homes in droves if the tax rates ever rise - not to mention property values would drop like a rock, thus turning it into a self-defeating measure. Nonetheless, other states do have much lower property values - and much higher property tax rates.

Caveat Emptor