Had a previous bad credit event? Don’t have two years in the same field? Income not three times your proposed payment? Fear not, when your financial picture doesn’t fit the box, here’s how you may still qualify some lenders…
To get a mortgage, you must have the four pillars lenders use to frame together a loan suited to your purpose. Your credit , debt, income and assets play integral equal roles in lender’s eyes. Let’s break down the nuts and bolts of lenders want in loan applications.
Credit-the score is best known financial barometer to predict the future likelihood of the default in the next 60 days. Obviously, you’re not planning to get a mortgage to subsequently go delinquent, but the credit report paints a different picture lender’s use to measure payment predictability. Lender’s want credit score of at least 620 or better. Beyond the score is the credit history revealing details about your past and current financial habits. Mortgage companies consider delinquent payment patterns a red flag including old collections of all kinds, past due balances even on accounts that are no longer active, expect an inquisition on such accounts.
How about a previous bankruptcy, foreclosure, short sale or loan modification? What if more than one of these events exist in your credit history? Again, fear not, be prepared to answer all questions regarding such events. Have supporting documentation? Even better, provide this to your mortgage broker upfront. Generally, even today you can still get a mortgage just a few years out of one or more of these credit events. Most commonly, is three years wait time for government financing ( i.e. FHA) and seven years on conventional financing ( with the exception of short sale waiting time is now four years). The most recent date is considered if one or more such credit events exist in your credit history. Active trade lines (meaning open credit) are another lending hot button. You’ll need to have at least two forms of open and available credit that you use regularly doesn’t mean necessarily carrying a balance , but it does mean there needs to be a display of credit activity. Gone are the days of using alternative forms of credit; cell phone bill or a cable bill for example in lieu of credit report trade line.
Debt– involves every single minimum payment obligation on and off your credit report, independent of general household expenses. These are the typical forms of liabilities lender must account for when determining how much mortgage you have are: any form of car payment, minimum payments on credit cards, student loans, personal loans installment loans, alimony or child support, garnishments and IRS debt. Seems simple enough unless credit reporting presents a dissimilarity. Most common example student loans may encompass one payment for one creditor, but multiple loans for the same creditor are revealed on the credit report. The fix? You’ll need to provide your mortgage broker a payment letter (from the creditor) identifying what loans are included with the student loan creditor and what the payment obligation is. Another common scenario, is cosigned liabilities. Any obligation to you cosigned for benefiting another party is what we means. In order for the other party’s debt to not hurt your loan proposal, you’ll need to provide documentation other person is making the payment directly to the creditor and has been since either the inception of the liability or the most recent last 12 months. This is usually accomplished with bank statements or cancelled checks. Reducing debt is immensely beneficial for loan qualifying debt hurt your income for a ratio of 2 to 1, it is two dollars of income to reduce every one dollar of debt.
Income– lenders must demonstrate your income supports the sum of proposed mortgage payment plus your other liabilities divided into your monthly income to not exceed 45%. If this debt ratio exceeds 45% you may need to look for less house, borrow less or pay off liabilities to improve your numbers. Regarding your income history, lenders look for a two year working in the same or a similar field. Don’t have it? That’s ok. Explain please, and be sure include any occupational gaps. Hourly wage earner? Expect your banker to average your year to date income. Salaried? Your income will be much more transparent in terms of qualifying because you’re a salaried meaning less likelihood of income gyrations.
Assets-how much down payment you have can dictate the loan program and ultimately how much mortgage you can handle. Assets include both funds for a down payment as well as savings in bank post closing escrow. Mortgage brokers, banks and lenders expect two-six months savings post closing and at least 3.5% of the purchase price for down payment. Have access to funds not yours? Gift money is viable alternative, just be sure provide the the full paper trail in any exchanging of funds.
*Mortgage tip: when buying a single family home, you need not have your own minimum down payment percentage. The full down payment funds can be gifted.
If you’ve been told you can’t attain a loan approval, get a second opinion perhaps even 3rd or 4th. Make sure to disclose all the pertinent known facts about your financial situation. A quality professional is going to ask you the who, how, what, when, where, and why. Answering these may make your quirky financial picture more much simplified and thus more green for an approval.
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