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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