All Buyer Assistance Programs Require Full Documentation of Income

Lots of people ask about first time buyer programs, government assistance, and other assistance. Mortgage Credit Certificate, municipal first time buyer programs, FHA, FHA Secure, even the VA loan.

The one thing they all have in common is that they require full documentation of income. You have to prove you make enough income to afford not only the loan, but the other costs of homeownership and your other debt service payments. Even ACORN. I may have a deep and abiding dislike for their politics, the partisan nature of how they use some of the money they get from the federal government, and the fact that they won't do business with small people like me, but they are sane enough that their loan guarantees require full documentation of income. The FHA allows a little irregularity on sourcing and seasoning of borrower funds, but it's hard as nails about documenting borrower income. You don't have to prove every penny you make, but you do have to prove you make enough.

All of these programs, without exception, are in place to encourage long term home ownership. The MCC and municipal programs (funded by federal funds) have an explicit goal of stabilizing neighborhoods. FHA and VA have the goals of expanding home ownership among those who need a little help on down payment. If you can't afford the payments, you're not going to be a homeowner very long. That wouldn't stabilize neighborhoods, and it wouldn't encourage long term home ownership - in fact, it would create problems that would likely follow you long enough to delay or discourage home ownership altogether. Therefore, they want to know that you can at least theoretically afford the loan you are biting off. Hence, full documentation of income.

What is acceptable documentation? Paystubs and W-2s or copies of income tax forms, depending upon exactly which profession you're in. The option of bank statements that exists with subprime loans is not acceptable, as they are too subject to manipulation and padding. Lenders accept paystubs and W-2s because there is a third party attesting to the fact that they paid you this money. They accept income tax forms because it's perjury to lie on tax forms, and more importantly, because declaring this income costs you money, in the form of taxes. $50,000 of income costs you more in taxes than $45,000 of income - and therefore you'd have to be pretty silly to declare more income than you actually make, because you'd be out the taxes without the income.

You also have to have a history of making the income. One paystub won't do. The usual standard is current and previous year, and your income is averaged on a monthly basis over that time frame. In some programs, they require three years of tax returns, even though you may be able to prove your income via paystubs and w-2s.

What does this mean? It means that they have a reasonable assurance that at the time of purchase, you can actually afford the payments on this property and all of your other debt, and be able to continue to afford them. Doesn't mean you won't lose your job tomorrow. Just means that as of the moment you have a documentable history of being able to afford what you're buying - and that even if you do lose your job, chances are good you'll find something comparable.

This frustrates the heck out of tax cheats, but also the self employed and other folks with large legitimate deductions, because it's adjusted gross income that is used, after all of the deductions and expenses and everything else.

It also means that when you're shopping for a property and hoping to use one of these programs, you have a hard ceiling on what you can afford under program guidelines, based upon loan rates, property tax rates, insurance, how much of a down payment you might have, and what your other debts are. Lenders pay a lot more attention to debt to income ratio than anything else when making a lending decision.

Suppose you're trying to plan ahead so you can afford as much property as possible, what's the best way to increase affordability? Usually, existing debt is the biggest obstacle, and paying down debts is usually the best way to increase what you can afford, providing you still have the necessary cash for closing costs and the required down payment. Basic money management advice: live within your means, don't charge anything you don't need to, and pay it off as quickly as possible. In California, $500 per month in existing monthly debt payments reduces the purchase price you can afford by roughly $75,000. By comparison, that's roughly the monthly payment on a $30,000 car or maybe $15-20,000 of credit card debt. This isn't a popular message - people don't want to hear about bad consequences or decisions they've made. It is nonetheless a fact of life.

So if you want to take advantage of any of the various governmental assistance or loan programs, you need to stay within a purchase budget. If you want to increase that budget, earn more money and declare it on your taxes, spend less, save more, and pay off any existing debts you may have.

Caveat Emptor