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Lender
Expectations
Determining
if the borrower qualifies for a mortgage is determined by a
wide array of different variables.
These variables often vary (and many times will vary
considerably), depending upon the type of mortgage that the
client wants or that you can qualify for.
Before saying “YES!” a lender will look at the following items:
-
each
applicants’ monthly income and expenses
-
each
applicants’ credit history
-
the
property appraisal
-
source
of funds for the down payment and closing costs
-
each
applicants employment history
Monthly
Income and Expenses
The
first question the lender tends to solve for is “Can the
borrower afford the monthly payments on this new mortgage?”
To find the answer, the lender examines your current
income and expenses plus the cost of the new mortgage and
apply them to payment ratios to see if you are within the
particular spending guidelines for that particular loan
program.
The
first payment ratio is called the “Monthly Housing Ratio”
or commonly referred to as the front-end ratio.
This ratio is the total monthly mortgage payment (PITI—principal,
interest, taxes and insurance) divided by your total gross
monthly income (i.e. before taxes).
This tells the lender exactly what percentage of your
income will be used to pay your new mortgage.
The
second payment ratio is called the “Debt-to-Income Ratio”
or commonly referred to as the back-end ratio.
This ratio is the total monthly mortgage payment (PITI)
plus the sum of the minimum payments required on your credit
cards, charge cards, car loans, student loans, installment
loans, child support paid, alimony paid and other credit
obligations divided by your total gross monthly income.
This tells the lender what percentage of your income
will be used toward your total credit obligations.
It
is important to also remember that these ratios do not take
into consideration the borrowers normal living expenses—i.e.
food, utilities, gas and automobile maintenance,
entertainment, car insurance, etc.
As a rule of thumb, your monthly housing ratio should
not exceed 28-33% and your debt-to-income ratio should not go
beyond 36-38%. Sometimes
exceptions can be made for a borrower with higher than normal
ratios IF you can demonstrate your ability to carry a higher
mortgage payment (e.g. you have paid on time for the past two
years a substantially high rent payment that is comparable to
your proposed mortgage payment).
As
stated before, the lender must know your income before he or
she can determine your ratios.
For all applicants, whether or not married, your
monthly income includes:
-
gross
monthly salaries
-
commissions
(using a two year average)
-
bonuses
(using a two year average)
-
investment
income (two year average and does not include dividend
re-investment plans)
-
pension
or trust income (must be able to prove a three year
continuation in the future)
-
alimony
and/or child support (that is received not paid out each
month and be able to prove that it will continue for at
least the next three years)
It
is important that the monthly income does not include
anticipated raises or unsubstantiated estimates of future
commissions and bonuses (even though this can be a strong
compensating factor). It
also does not include investment income on accounts or assets
that will be used for your down payment.
Credit
History
The
second issue the lender looks at is credit by asking the
question “Have the borrowers repaid your past debts in a
timely fashion?” The lender
finds this out during the pre-qualification process by pulling
an “in-file” credit report.
Also, credit history is established by ordering a
residential mortgage credit report (RMCR) that is submitted
with the loan package. A
RMCR differs from an in-file credit report in that it is a
merged report, pulling from a minimum of two credit
repositories, verifies accurately the current balances and
payments of all of the borrower’s reported credit
obligations and typically the company we order the RMCR from
interviews you and verifies from you the information reported
by the credit repositories.
The
payment history reflected on the RMCR is of critical
importance for it shows how many times you were more than
30/60/90+ days late in making your required monthly payments.
It also shows your usual payment patterns, whether you
always pay on time or are usually late.
In addition, it normally reports any judgments, liens
(tax, mechanics, etc.) bankruptcies, divorces and other public
record information.
It
is vitally important for you to disclose any known or possible
credit problems to the lender as soon as possible.
Typically the lender can work around bankruptcies,
foreclosures or other problematic situations if properly
explained and documented.
However, failure to disclose credit problems or answer
all of the related questions on the mortgage application is a
sure fire way to be automatically denied for a loan.
Property Appraisal
The
third question the lender asks is “How much is the property
worth?” An
appraisal is necessary to establish the value of the property.
This is ordered by my loan processor after application
and it not only establishes a value on the property but
reports on: detailed
information regarding the subject property, marketability of
the home and neighborhood, obvious construction problems or
defects with the house and other factors that affect the value
of one’s home.
Source
of Cash for Down Payment and Settlement Costs
The
fourth question the lender asks is “Do you have enough money
to close the sale and where are you getting it?”
One of the steps during the verification process is to
ensure that you have enough money to close on the home by
verifying bank deposits, getting sufficient gift letters for
the down payment or other written evidence of funds.
The following is a list of acceptable sources of funds:
-
checking
and savings accounts
-
borrowed
funds (against a secured asset—i.e. a car, CD’s, real
estate, life insurance, etc.)
-
earnest
money deposit
-
gift
funds (if it does not have to repaid)
-
IRA’s
and Keogh Accounts
-
sale
of assets
-
stocks,
bonds, trust accounts or other investment accounts
However,
the lender cannot accept the following as acceptable sources
of funds:
-
cash
on hand
-
proceeds
of a personal or unsecured loan
-
a
gift that must be repaid in full or in part
-
cash
advance on a revolving charge account or unsecured line of
credit
-
cash
for which the source cannot be verified
Employment History
The
final question the lender asks is “Will your future income
be stable enough to meet the required monthly mortgage
payments?” Ideally, the lender look for a two year history in a
profession (not necessarily with a particular employer).
Frequent job changes, spotty employment history or
unstable employment may cause us to go through extra hoops in
order to prove your future job stability.
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