Gearing up to refinance or buy a home this year? These five nuances may stop your financial plans dead in the tracks. Here’s what to know to avoid your mortgage loan application being denied…
Your Credit Score Is Not What You Think It Is
Happens every day. A consumer will get one credit score from a credit monitoring company and think their 720 score is exactly what their mortgage lender will use in conjunction with their loan application. Not the case. A mortgage company will pull three credit scores, one from each credit bureau. The lender will use the middle credit score as the best measure of risk .
Another common credit misnomer is a disparity among actual scores from lender to lender. For example you might have your credit score pulled the 20th of the month and it might be 720, pulled again on the 25th while reviewing another mortgage company, and it might be 698. Why the disparity? Well depending on whatever balances you carry on credit cards for example could definitely influence the difference in credit score in relationship to when those balances on those credit accounts report to the bureaus in sync with when you are applying for credit . To get a mortgage you’ll need it least a middle 620 credit score bar none across the board.
If your credit score is in the 620 range, and you’re looking for a conventional loan, be prepared to put down at least 20% as Fannie Mae and Freddie Mac heavily discriminate against low credit scores with high loan-to-value loan down payment loan options. The 3.5% down FHA Loan is a much lower cost more favorable choice in that type of scenario.
You Have A Job Gap Bigger Than 6 Months
Mortgage companies want to originate loans that perform over time. As such, proving continuance of employment shows the lender the risk they are taking in making that loan is minimal. When you apply for a mortgage a two-year employment history is required. If in the last two years, you had a job gap bigger than six months, that’s a red flag unless you have a reasonable and logical explanation for the events that transpired causing the gap. This gap is worsened if you are working in one field, have a job gap say for eight months, and then return to work changing industries into something else entirely.
If you have do not have a history of working in the same field and/or in the same role within your occupation, you could be face lending roadblocks. If the job gap was due to an unforeseen, yet explainable and documentable circumstance or a family related event such as the maternity leave or an illness, those types of instances hold more water. The key here is to have an explanation about the job gap and be able to explain the when to when to dates. Give the bare-bones facts it its pure and simple form, so your loan officer can go to bat for you in pushing for a loan approval.
Your Income Is Not Straightforward
This is especially true if you are an hourly employee and changed jobs in the last 24 months. The lender will have to average your hourly wages into a monthly income figure and this averaging might give you less money on paper what you otherwise are actually earning. History of earning an hourly wage is a integral component of how your hourly income will be averaged.
Do you have over time? You’re going to need at least a 24 month history of earning that over time income if you need or want the OT income to count against a mortgage payment. Work more than one job? You’ll need a history of working two jobs together simultaneously, if that applies to you. Working for a family business? Your income will be derived from tax returns, two years worth, pay stubs and W-2s will be requested, but in this scenario, tax returns will be income driver the lender uses to qualify you.
*Be upfront with your lender about your income, what your compensation structure is like, how it works, how frequently you are paid, and what annual bonuses and/or additional compensation you receive- doing so will help your loan professional pragmatically put together a loan scenario for you that will have the underwriter clamoring for more borrowers like you.
You Don’t Have Enough Cash To Close Escrow
Gone are the days of only needing 3.5% with an FHA Loan for example to buy a home and asking the seller to scoop up paying your closing costs. You want to buy house today? In Sonoma County, CA you will need at least $20,000 to be in the game.
Be prepared to spend the the full down payment plus closing costs. Don’t have it? Gift money is always a possibility- know most mortgage loan programs want at least a blood relative donating the funds, although exceptions can be made depending on lender and program. Make sure any gift funds, are sent directly to escrow.
Avoid this situation: gift money goes into your primary checking account where your daily ledger for paying bills also comes from. It will look like you’re spending your down payment, keep the cash for the house out of your primary checking account. Other cash to close issues arise when there is no way to document deposits going into a bank account and those monies have to be literally ignored by the lender. Even though the money is not there, you still technically have a cash to close issue in wrapping up your transaction because the money cannot be paper trailed.
*Think “can’t document, can’t use”.
To buy a house these days you’re going to need at least a down payment in full of 3.5% plus closing costs. Closing costs typically run about 3% of the purchase up to $500,000, exceeding $500,000 drops to about 2% and anything sub $300,000 is going to run upwards of about 4% of the purchase price in total closing cost numbers.
You Are Living Too Big For Your Bridges
The old saying “Robbing Peter To Pay Paul” applies here. Living your life on credit, spending beyond your means and caring big debt…. greatly reduces your mortgage and home buying odds. It is is unfortunately that black-and-white unless your debt payments are very little in relationship to your monthly income- about 5%. Anything bigger than this will wane on how much you can ultimately borrow. Payments on car loans, lease payments, student loans, credit cards, all of these things, count against your borrowing strength in a mortgage situation.
Know this: When a mortgage company makes you a mortgage loan, it’s not a loan against the house, it’s a loan against your income. The more loans you have against your income before a mortgage is counted for the less mortgage you’re going to be able to take on. If your income is a free and clear of debt, borrowing strength increases, and your ability to manage a mortgage payment greatly increases, not only from a qualifying standpoint, but as good measure of personal finance.
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