What really goes into qualifying for a mortgage loan?
Mortgage qualification does not have to be a secret. There is no magic crystal ball to see who gets a mortgage and who does not, there are three main criteria for qualifying for your new mortgage.
- JOB
- MONEY
- CREDIT
Qualifying for a loan is a process that our professionals are trained to guide you through. All borrowers are unique and it is important to discuss all aspects of your situation with a professional. We are able to not only understand your situation, but also put you in a position to get you qualified as soon as possible.
Job
A consistent two year work history is required on all mortgage loan applications. Underwriters will review any job and income activity for the last 24 months to determine that the potential borrower has the stability to repay the loan in which they are applying. Frequent job changes or a new job will not eliminate a borrower from qualifying, any changes will require proof and explanation.
A salaried or W-2 employee can use their current rate of pay for qualification with proper verification. Any variable streams of income such as tips, commission and capital gains will need to have a two year history in order to average that income for qualifying purposes.
Both Conventional and Government loans have requirements regarding your allowable amount of monthly debt in relation to your income. That is called your debt ratio or DTI. Many programs would like to have your DTI under 45%. That means that your house payment and all other credit related liabilities are less than 45% of your gross income, however, each situation is unique and depending on the circumstances debt ratios greater than 45% are approved on a normal basis.
Simply put, can you afford the house you want to purchase.
Money
With the exception of Veterans, most mortgage applicants will be required to put a down payment on the home they are purchasing or have equity in their current property to qualify. The amount of equity or down payment in relation to the value of the home is called Loan to Value to LTV.
The minimum down payment for most conventional loans is 5%, and FHA loans require a 3.5% down payment. The money for down payment must come from an acceptable source or be a gift from a direct family member.
The higher the LTV the more risk that is associated with a particular loan. That risk will be addressed by the underwriter with higher fees of the requirement of mortgage insurance.
- Conventional Loans - all conventional loans with an LTV greater than 80% will require mortgage insurance of some sort.
- Government Loans - VA and USDA loans do not have mortgage insurance and are not required by the program parameters. FHA loans will all have mortgage insurance regardless off the LTV.
Do you have money to buy a house?
Credit
All borrowers must have their credit reviewed to make sure that they show that they will repay the new mortgage debt. By reviewing the past credit it allows the underwriter to determine each applicant's credit worthiness. The following information is a snapshot of credit criteria, but not all inclusive. Each borrower will have unique credit history.
Credit Score - each of the three main credit repositories have numeric scoring system they use to grade applicants credit history. Different loan programs have different credit score requirements.
- Conventional Requirements - conventional loan programs normally require a minimum credit score of 660 with no consumer late payments in the last 12 months.
- Government Requirements - these mortgage programs have lower credit score requirements and may qualify borrowers with scores as low as 580.Scores below 600 are normally approved on a case by case basis.
Bankruptcy - mortgage loan programs normally require a certain amount of time to have passed from the time of a bankruptcy filing.
- Conventional Requirements - Chapter 7 requires minimum of 4 years from the date of discharge. Chapter 13 requires a minimum of 2 years from date of discharge.
- Government Requirements - Chapter 7 requires minimum of 2 years from the date of discharge to be eligible for qualification. Chapter 13 requires 12 month payment history
Foreclosure - the loss of a property due to short sale, deed in lieu, or foreclosure sales will all be viewed in the same light and will have the following restrictions.
- Conventional Requirements - 5 years from the date of foreclosure sale must have passed before applicants are eligible for conventional mortgage financing.
- Government Requirements - 3 years from the date of foreclosure sale must have passed before applicants are eligible for government mortgage financing. A borrower with a short sale on credit will be eligible for financing after 2 years.
Collections - any accounts that have been sent to a collection status due to non-payment are reviewed differently than slow pays.
- Conventional Requirements - any open collections must be paid in full or removed
- Government Requirements - open collections under $1000 combined will normally not be required to be paid.
Judgments - any open judgments that could possibly affect title will need to be paid and show proof release for financing qualification.
Are you a good credit risk?
So what happens next?
Getting pre-qualified for your loan normally takes a meeting or phone call with your loan officer. During the call you will discuss these three items and see if there are any challenges with any of those items. They will calculate your income, review your assets and pull a copy of your credit.
From this point you will have a good idea of how much you can qualify for in terms of loan amount or purchase price. If you have all of your necessary documentation at the time of your initial meeting or call, you could be pre-qualified within 30 minutes. During this time your mortgage professional will be able to outline the next steps in the process as well as any additional documentation that you will need to provide.
If you would like to get pre-qualified for a purchase or refinance please contact one of our mortgage professionals today.
