What is the Lender Criteria for Approving Home Mortgage Loans?

What is the Lender Criteria for Approving Home Mortgage Loans?

 Buying a home is a dream for most Americans.  The process is time consuming, paperwork intensive, and can seem overwhelming to many people. The reality is that the process, like anything other unknown in your life, really isn’t as bad as the hype.
Essentially the mortgage lender is going to check you out, evaluate your risk, and decide if they they are going to give you the loan.  It is important to understand how credit institutions evaluate home loan applications and what is required to ensure easy loan approval.

Loan Documentation

The first thing the lender needs is your basic application.  images98725You can provide that in person, over the phone, or with a secure online mortgage application.  Next will be a review of your basic documentation to verify and back up what you supplied on your application.  If you said you make $60,000 a year, great,  prove it with the last 30-days of pay stubs, the last two-years W2’s, and your federal Tax Returns.  If you said you have $20,000 in the bank for down payment, great.  Prove it by supplying your last two months bank statements.

Pretty straight-forward so far.  But each person is different, so you may need other documentation.  Recently divorced?  Provide your divorce decree.  Receiving alimony, child support, social security, pensions, disability, or other sources of income.  No problem, but again, prove it with the appropriate supporting documentation.  Have an old bankruptcy?  We’ll need a full copy of your bankruptcy papers, including the discharge notice.  Have an old foreclosure or short sale?  We’ll need the paperwork to verify the date.

Once all this is established, we can determine loan eligibility.

Income to Debt Ratio’s

Debt-to-income ratio’s, or DTI, is simply a calculation of how much money do you make, and how much would the new home itself cost as a percentage of your income. We also look at any other existing debt, then determine what the new house and existing debt would equal as a percentage of income.  If these numbers are too high, you’ll be denied because you are stretching yourself too thin.

DTI is one of the major deciding factors for your loan application. To understand how a loan application gets reviewed, here is a sample:.

Two individuals, Bob and Mary apply for home loan of $200,000.  Bob makes $40,000 a year salary, and Mary makes $30/yr, full time. This equals about $60,000 a year. So adding those two, their combined qualifying income is $100,000 yr, or $8333 a month before taxes.

Bob has a car loan of $300 a month, and one credit car, with a minimum monthly payment of $50 a month.  Mary also has a car payment of $275 a month, a $50 a month student loan, and credit card with minimum payment of $75.  All this debt equals $750 a month.  For most loans, mortgage lenders do NOT look at utilities, car insurance, day care, etc.  Just the items that show on your credit report.
The house they want to buy is $300,000.  They plan on putting a large down payment of 20% ($60,000).  Factoring in paying back $240,000 at 3.50% interest, homeowners insurance of $1320 a year, and property taxes of $3600 a year.  Their monthly payment would be $1497.
The house payment works out to be 17.9% of their monthly income (housing ratio), and with there $750 in other debt, their total debt ratio is $27%. Both of these numbers are below maximum debt-to-income ratio’s, so Bob and Mary are in good shape.  They are buying a home they can safely afford.
Credit Report and Score
The credit score works as a first impression for the lender, the higher the score, the better is your chance of the loan being  approved.  Credit scores are not perfect, but generally are a pretty good indicator of your risk.
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Poor credit scores, essentially anything below 640, and you should probably not bother applying, and work on improving credit first.

Down payment and Cash to Close

Buying a home is going to require money.  Even no down payment loans require some money, especially once you start factoring in closing costs.  Mortgage lenders care greatly about you proving the money needed to buy the house.  We will look at your last two months bank statements.  Did you have the money, did you transfer it from a different account, is it a gift?  If you show large non-payroll deposits, expect to be asked, and to prove where the money came from.
The reasoning behind this goes to many items, from fraud, to undisclosed debt.  Is that large deposit a gift, or really a loan that you’ll need to make payments on, for example.

The Bottom Line

To sum up, while a high credit score, strong credit history, big down payment, and good income will help in loan approval, they, by no means, guarantee one. Having manageable debt levels also plays an important role. Lenders make money by lending money. We want to give you a home loan. On the other hand, the whole purpose of underwriting is to minimize risk. A home buyer unable to safely afford the home is not good for them or the lender.


USDA to lower mortgage insurance costs

USDA to cut loan mortgage insurance costs

The USDA Rural Housing home loans will soon get  cheaper for homeowners with lower mortgage insurance costs.

USDA Rural Development LoansUSDA announced last month that it was lowering its upfront mortgage insurance premium fee to 1 percent of the total mortgaged amount, down from the current from 2.75 percent. This amount is added to the borrowers loan.  So someone today borrower needing a $100,000 loan would actually have a $102,750 loan. Under the new guidelines, the same borrower would have a $101,000 loan.

The monthly mortgage insurance on a USDA loan will also be reduced from the current .50% to just .35%.  On that same sample $100,000 loan, this means a monthly mortgage insurance drop from $42.84 a month to $29.99 a month.

The change becomes effective Oct. 1, 2016, and will bring the fees and insurance premiums down to pre-recession levels.

The agency said that the cuts were possible because of the bulk of the mortgage and housing crisis is over, and foreclosure rates have fallen to back to more traditional numbers.

Learn more about USDA rural housing home loans in MN, WI, and SD.


Consumers disqualify themselves for home loans

Consumers Misjudge Max Debt-to-Income ratios… and Disqualify Themselves from home loans

According to a survey by Fannie Mae’s Economic and Strategic Research Group, many consumers think it’s difficult to get a mortgage in today’s market.images98735

And forty five percent of those respondents cite too much existing debt as a top reason. Yet, in that same group, more than half don’t actually know the maximum debt-to-income ratio (DTI) required by lenders.

The result — potential buyers may be wrongly disqualifying themselves before they even apply for a mortgage.

That’s why it’s key to provide information, resources, and tools to educate consumers on the mortgage process, and any perceived barriers, including Debt-to-Income guidelines.

This is also why it is key for the consumer to work with a fully licensed and experienced Loan Officer, versus the more common unlicensed mortgage loan application clerk, who can help you determine the best home loan program, and explain the various program rules and guidelines. On a regular basis, I come across clients who think they can’t be approved for a home loan, yet they can. On the other hand, I also run across plenty of people who have no chance of getting a home loan today, yet they apply.

The bottom line is that it never hurts to apply. You may be given a pre-approval for your dream home, and if not, you’ll be given details on how to improve your situation to be able to qualify later.

Learn more about how to choose a mortgage loan officer here.

Download more insight on DTI and learn about the overall study here.


How long does it take to close a loan

How long does it take to close a loan?

Getting a home mortgage loan in today’s world is a cumbersome paperwork intensive process.  Especially with all the recent regulatory changes added since the market crash.

images98725Not everyone realizes how long the process takes, but this is good information to understand when setting proper expectations for closing dates.

A large portion of mortgage lenders use the same software from Ellie Mae. Through this software, they are able to track the entire process, providing great industry insights.

According to the December 2014 Origination Insight Report from Ellie Mae, the average time to close a loan in 2015 took 49 days.

The average time to close a refinance dropped to 47 days, while the average time to close a purchase transaction increased to 50 days.

Obviously these are averages, so can some loans go through the process faster?  You bet.  Some slower?  Of course.

As a Loan Officer for 20+ years, by far the biggest delay I see in closings is cause by the client, by the client not providing requested documents to the lender in a timely fashion. By having standard documents ready to go up front, and responding to any document request from a lender in a timely fashion, the client can help achieve a smooth and successful on time closing.

Here are a few additional tips for a smooth home loan closing.


Nationwide January Home sales dropped 9.2 per cent

Nationwide January Home sales dropped 9.2 per cent

Americans stepped back from buying new homes in January, as purchases plunged sharply in western states where prices are typically higher. The Commerce Department said Wednesday that new home sales fell 9.2 percent last month to a seasonally adjusted annual rate of 494,000. Most of the decline stemmed for a 32.1 drop in sales in the West. Sales also slipped in the Midwest, while edging up in the Northeast and South.New Construction Loans in MN, Wi, SD

There was a sharp fall in sales of newly-built single-family homes in January. The 9.2 per cent drop took sales to a seasonally-adjusted rate of 494,000 units according to data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The National Association of Home Builders says that the dip follows a stronger-than-usual December and the underlying trend is positive that after an unusually high December reading, some pullback is to be expected.

The inventory of new homes for sale rose to 238,000 in January, which is a 5.8-month supply at the current sales pace and the highest level since October

Building a new home? Find new Constructions Home Loans in MN, WI, and SD here.

Side note: I always chuckle at these monthly reports.  They really have little meaning on a monthly basis.  The long-term trend is the more important view.


Home Builder PROFITS way up – and its not from building homes!

Minneapolis, MN:  Recent reports show homes builders are making record profits – but not from building homes! What then you ask?  From providing the mortgage loans the “builder” give to people buying their homes!

Pulte Homes shows mortgage loan revenue up 70%, which is 6 times higher than their revenue from building homes. Home builder Lennar Homes shows mortgage revenue up 60%!

The reason?  The margins on the loans they force… Oops… Offer people buying their homes are fat.  Really fat.

It is a well known fact that home buyers can get significantly better mortgage loans deals when NOT using the builders in house lender, but home buyers don’t seem to care because they are blindsided by the shinny new object (the home), and fall for the tall tails the builder throw at them – items like “no closing costs”, and “appliance allowance” that are already being paid for within the cost of the home itself.  It is no “deal”.

Most new construction home buyers fail to ask, or even realize how the builder is able to give them these freebees…  and that in most cases, you could still get those items AND get a better mortgage loan with someone else, if the buyers just had a little better negotiation skills and employed a “buyer agent” real estate agent instead of simply working with the builders agent.

Many people think the days of sleezy tactics, high pressure sales, and low balling customers on interest rates and closing costs are gone because of new regulation – and they are for the most part, unless you are working with a new construction builder, in which case,  the government seems to be looking the other way.

No wonder builders are making a killing in the mortgage loan business!

 


Adjustable mortgage loans popular again. Here is why.

Adjustable (ARM) Loan Resets Cause Foreclosures – Fact or Fiction?

Saint Paul, Minnesota: Requests for adjustable mortgage loans dropped to near zero the past few years because of the general belief that adjustable loans are bad, and that recent high levels of foreclosures was because homeowners were doing fine with their loans until their adjustable loans reset to higher rates.

Lenders are again starting to see inquiries about, and home buyers again taking adjustable rate loans because of the super low adjustable loan rates.

FACTS VERSUS FICTION:  According to recent nationwide data, the number one reason homeowners default on their home loans was because their income was cut. This accounted for just under 60% of loans in default. Once traditional causes of foreclosure are factored in (divorce, major illness), cash flow problems added up to a whopping 80% of all “causes” of defaulted mortgages nationwide.

Adjustable payment loans resetting to a higher payment alone accounted for just 2%, according to the data. Rather than being the cause, they appear to be the final straw that breaks the camels back of people who were already in financial trouble.

ADJUSTABLE RATE MORTGAGES: Adjustable Rate Mortgages (ARMs) became one of the most popular and effective tools for helping some prospective homebuyers achieve their dream of homeownership between 2000 and 2007. Initially developed during a time of high interest rates that kept many people out of the housing market, the ARM offers lower initial interest rates by sharing the future risk of higher rates between borrower and lender.

IS AN ADJUSTABLE MORTGAGE RIGHT FOR YOU? Talk to a local licensed Loan Officer (not an unlicensed bank application clerk) about the benefits. ARMs can be an excellent choice of financing under certain conditions, such as rising income expectations, high interest rates, and short-term homeownership plans. But because payments and interest rates can increase, either steadily or irregularly, homebuyers considering this kind of home mortgage loan need to have the income to keep up with all possible rate and/or payment changes. Each ARM has four basic components:

  • Initial interest rate, which is typically one to three percentage points lower than that of most fixed rate mortgages.
  • Adjustment interval, at the time between changes in the interest rate and/or monthly payment will be.
  • Index, what lenders use to determine future rate changes. This is usually LIBOR.
  • Margin, or the additional amount the lender adds to the index to establish the adjusted interest rate on an ARM.

Typical adjustable loans come in 1-year, 3-year, 5-ya, 7-year, and 10-year initial fixed term options. The 5-year adjustable is super popular. The rate is fixed for the first five years of the loan, then becomes adjustable on a yearly basis.


Current lending rules too tight

The percentage of mortgage applications rejected by the nation’s largest lenders increased last year, spotlighting how banks’ cautious lending practices are hampering the nascent housing market recovery.

In all, the nation’s 10 largest mortgage lenders denied 26.8% of loan applications in 2010, an increase from 23.5% in 2009, according to an analysis by The Wall Street Journal of mortgage data filed with banking regulators.

Although lenders were expected to pull back from the freewheeling conditions that helped inflate the housing bubble, some economists argue they are now too conservative, and say that with the U.S. economy still wobbly, mortgages need to be easier to obtain for qualified borrowers, not harder.

Read the full story


NAR fees are up, and I’m on a budget

NAR fees are up, advertising costs are up, real estate sales are down, but as a Real Estate Agent, you need to find more clients, and you need to do it on a budget. Here are a few simple tools to increase your business and make more money from Joe Metzler at Mortgages Unlimited, and the Mn Real Estate Daily Show.

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Zero Down Home Loans Are Back

Zero down payment home loans are back. Actually, some of them never went away. VA and USDA Rural Development are two very popular home loan options. Learn more by watching this ROYAL performance… CG LIVE from London!

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Smart financial move, the 15-yr mortgage

Smart financial move, the 15-yr mortgage

Minneapolis, MN:  “I own my home free and clear!“. How great would it be to say that? No payments when you retire. No payments while you are also paying for college. Putting money into your 401k vs paying it to the bank.
Look into a shorter term mortgage. This is the hottest new trend in home ownership.
Your parents probably took a 30-year fixed rate FHA mortgage, then tried to pay extra along the way to pay it off early in hopes of having no payments going into retirement.
During the period of 2001 – 2008, it was just the opposite. Many people opted for an adjustable mortgage, interest only mortgage, or even a 40-year mortgage. The reasoning was they would be flipping the house in a few short years at a great profit, so they didn’t really care what the payment was.
Today, old school thinking on the fast plan of a shorter term home loan is very popular.  Me me me, now now now, has been replaced with a pay it off fast mentality.
Clearly a shorter term loan saves you a lot of money in interest. On a $200,000 loan at 4.75%, the payment (just the loan) is $1043 per month. The total interest paid is a whopping $179,888. Switch that over to a 15-yr loan at 4.25%, and the payment goes up to $1504 per month, but the total interest is just $75,079. Half as much! A interest savings of $104,809

Many people claim they can’t afford the 15-yr payment, but I say otherwise. The average person can usually easily absorb the slightly higher payment with a little discipline and a slight adjustment to their monthly budget.

Eliminate the second new car, go out to a nice dinner a little less often, and shutting off the cable or satellite premium service all start to add up quickly, giving you one of the best savings opportunities of your lifetime.

I also hear many people talk about the loss of the interest tax deduction. I have a challenge for you. Can you tell me exactly what your tax write off benefit was this year?  Most people can’t.  The tax deduction is over-rated. Once you figure out how little it really adds up to in real dollars, you’ll quickly see the benefit of paying your home off faster.
Stop pissing money away on a 30-yr mortgage, refinance to a 15-yr mortgage. Earn equity faster, own your home in half the time, and make one of the best financial moves of your lifetime.


CONSUMERS to PAY MORE for Home Loans!

CONSUMERS to PAY MORE for home loans because of NEW Federal Reserve Rule. The video shows a few examples of why the new rule will force every single person getting a home mortgage loan to pay MORE

Senators Rally to Delay LO Compensation Fed Rule

Two lawsuits have been filed to stop the rule which otherwise begins wrecking the housing and mortgage industry on April 1, 2011

Another great video from the boys at tbwsdailyshow.com



Top Reasons Why Your Should Refinance Today

Joe and Eric Metzler talk about why you should refinance today. Mortgage Interest Rates are set to go up soon  for many reasons. Fannie Mae and Freddie Mac are both increasing the wholesale costs of mortgage loans, the economy may be improving, and home values may continue to fall slightly, all items that will effect your mortgage interest rates. Searching rates on home loans, or rates for refinancing your mortgage in MN or WI? We have some of the best rates on home loans!

Visit Mortgages Unlimited, St Paul, MN at www.MortgagesUnlimited.biz