Applying for a residential mortgage loan these days does require heavy detailed documentation. Everything from full tax returns, to pay stubs, to bank statements to letters of explanation regarding your credit, debt, income, and assets is the norm. Here are four common underwriting roadblocks and how to fix them…
Change To Income– let’s say the underwriter at the loan company determines based upon your pay stubs and tax returns your income is lower than what the loan originator said it was. An easy offset is a written verification of employment (VOE) which specifies and breaks down the income. This is especially important if you an hourly wage earner with gyrating income e.g. varying hours worked, bonuses, or overtime, that has not been in existence for the most recent last two years. Two years is magic income history figure lenders want, but is not necessarily a deal killer. Here’s the reality- you’ll need a lender who can work with your ancillary income with less than 24 months. This is the type of thing they can make or break your loan especially with income beyond a traditional fixed salary.
Your Debts Eat Too Much Of Your Income
Your consumer debts like student loans, credit cards, and car loans for example are just too large for the mortgage amount you’re applying for, raising your payment to income ratio when mortgage payment is factored in. Closely related to any changes in income, the amount of debt you have is in direct proportion to not only your qualifying ability, but the amount of percentage of your income that specifically is going to be going towards liabilities. If your debt to income ratio exceeds 45%, to still qualify, you’ll need to make a change in any of the following ways:
- reduce the payment on the mortgage
- reduce and/or remove the payments on the consumer loans
- reevaluate the income
Mortgage Tip: your payment to income ratio also called the debt to income, is calculated this way: take the minimum payments you have on all current consumer obligations, add those to your proposed total mortgage payment and divide the sum of those numbers into your monthly gross income.
Correctly Paying Off Debt
Let’s say you have credit card payments totaling $300 per month for a balance of $10,000 cumulative over 2 to 3 credit cards. The plan of action is now to pay off these credit cards subsequently reducing the payment liabilities lowering your payment to income ratio.
This can be very tricky if not done correctly, and can very easily skew the underwriter’s perception of what your liabilities truly will be by closing. When you pay off consumer debts to qualify, the account/s must be closed as well. This can be problematic as closing credit cards generally is not good for maintaining a healthy credit score. It is true you could simply reopen the credit cards after you close on the mortgage anyway, but lenders do not view it that manner. They assume you’ll close the cards and not open them later on.
An alternative option involves getting an updated credit report reflective of the debts paid off in full without any payments due. The key is to make absolutely sure each creditor whom you paid off in full specifically reports to each credit bureau a zero balance and a zero payment due.
Mortgage Tip: if you are buying a home and, are reluctant to pay off and close credit cards, fear not. Getting a mortgage in your name will automatically make your credit score rise which will more than offset any negative ramifications brought on by closing out the credit cards.
Previous Credit Issue Or Home
Let’s face it mortgage loan originators are human, and they make mistakes just like everyone else. Let’s say your mortgage officer did not ask or was unaware of you having a previous short sale in in the last four years, not reporting on your credit report. This will stop your conventional loan from happening if it is in the last four years which would mean moving into an alternative loan program such as FHA for example.
Lenders run each borrower through a comprehensive background screening through multiple fraud databases which would identify any other property you were tied to in the last seven years. If any other unaccounted for properties pop up, documentation will be required to either show the property is no longer yours or it was sold or the carrying cost of that property would be factored into your payment to income ratio.
If you are not sure about something financially related to your loan application just be sure to ask your loan professional. Should any unforeseen roadblocks pop up in your mortgage loan process call your loan officer right away explaining the scenario and get a read on what type of documentation will be needed to satisfy the condition and/or the problem. An experienced loan professional that has a background within the mortgage loan product type you are working with can guide you through to a successful closing.
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