The yes or no outcome of the mortgage application process is so consequential to so many potential homeowners that it sometimes seems mysterious and foreboding with no control over time or reasoning. There is only waiting and wondering. Mortgage financing is actually pretty straightforward and I have found that having the CIA conversation early in the preliminaries tends to enlighten most borrowers as to what to expect.
For the most part, home lenders use CIA to evaluate three things; your Credit, your Income and your Assets, CIA. That’s really it. Of course there is lots of nuance and varying layers of acceptable along with shades of deviation from home lending guidelines that require evaluation and approval. However, the fundamental goal of every loan decision is to determine if the home loan (a) will be paid back and (b) will be paid back on time. For now, I will break down the basics, please hold your questions until the end.
Credit scores and credit history sit atop the pecking order as the major determinant of your mortgage-ability. Depending on the credit reporting agency (Trans-union, Experian and Equifax), your credit score can range from the mid-300s to the mid-800s, with each agency using a different algorithm. Low credit scores can make the task of securing a mortgage loan more challenging and high credit scores tend to smooth the journey through the mortgage approval process and get you the best rates.
One thing about credit scores though, if you have recent history with a resolved or not yet resolved big-deal issue, your strong credit score may not be enough to get you an approval. A late payment on a mortgage, unpaid collection accounts or judgments, short sale of a previously owned home, or the 'F' word –
foreclosure – can live quietly in your credit history and you can still have a mortgage-able credit score. Confirm that your mortgage lender reviewed your credit report and is aware of any issues that may be a barrier to approval. Be upfront and disclose what you know might be a problem. If you pretend a potential credit issue just evaporated on its own, it may spoil the party later. Sometimes when a home lender sees an acceptable credit score, they may not take the time to see what is lurking below. Be proactive; don’t hope that past problems just went away. They didn’t.
Income is trickier, can have more moving parts and can present a host of challenges depending on the types and the scope of compensation sources. The goal for every borrower is the same, in the simplest terms: you need a two-year employment history (does not have to be the same job) and documentable, verifiable honest-to-goodness income sufficient to support the debt service as measured by those all-important Qualified Mortgage front and back debt ratios.
Qualifying income can be tricky for loan approval because there are so many types and sources of compensation that can be considered: salary, hourly, bonus, commission, full-time, part-time, self-employed, dividends & interest, pension, disability, SSI, SSD, child support, alimony, passive, non-passive, rental income and on and on. To make sense of it all and help mortgage people organize and calculate income information uniformly and consistently, the mortgage industry uses Income Calculation Worksheets. These are typically very detailed Excel pages that encompass virtually every possible source of income that can be gleaned from tax returns and calculates based on underwriting guidelines what is usable for qualifying. These results are transferred to the mortgage application and presto, income is ready for underwriter cross examination.
Assets are chased to determine if borrowers have enough money for the down payment, closing costs, escrows, pre-paids, etc., and to see if there is any money left over. Money left over is politely referred to as “mortgage payment reserves.” Mortgage lenders like payment reserves and in some cases they are required, because just in case something catastrophic were to happen, borrowers can tap into these liquid or near liquid assets to continue making timely mortgage payments.
The source and form of assets to be used can range from simple accumulated savings in a bank account to all manner of dollars and cents from all kinds of interesting sources. You see, depending on where it is and who owns it, not all assets make the cut for acceptable underwriting-guideline usable funds. Joint accounts with someone other than a co-borrower, gift funds from someone other than a relative, funds transferred from overseas, cash “not held in a depository relationship" and all manner of seemingly acceptable sources of cash to close may not hold up under interrogation. Disclose all you know and let the lender sort it out.
Remember, mortgage approval is a team sport and your mortgage rep, your processor, the underwriter, everybody in the building has the same goal that you have: closing on your new home. Be a teammate, give 100 percent, hold nothing back and everybody wins.
A loanDepot licensed loan officer can help with these and any other lending questions. Call (888) 983-3240 to speak with one today.
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