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.


In Real Estate, When you snooze, you lose

In Real Estate – When You Snooze, You Lose!

Minneapolis / St Paul, MN: A big shift in the housing market in our area has taken many by surprise. Any qualify house under $200,000 is selling in just days, with multiple offers, and above asking price.

With dwindling inventory, mostly from fewer foreclosures, increased demand with more competition because of terrific interest rates, we are seeing more and more multiple offers. This often happening soon after a property hits the market. It brings to mind the popular axiom “when you snooze you lose.” Wait too long to look at a great, well-priced property, or to make a strong offer, and you’ve lost your opportunity.

The problem some of you must confront is that even once you learn NOT to snooze and to move fast, you still might lose.

Why?? 

  1. The offer isn’t strong enough even at list price
  2. There are many offers (sometimes 10 and more)
  3. Cash buyers are too plentiful
  4. Lending rules on homes needing a little work

Is this the case with all properties? Certainly not. But we are seeing more competing offers at many price points, and new listings moving more quickly than in the past few years. This is not intended to scare you, and or make you feel that you cannot compete effectively. Simply understand the market has shifted in some significant ways and you need to be aware so you can react accordingly when you find a home you really like.

PAUSE if you aren’t ready to jump, then you shouldn’tJust because things have heated up and there are “bidding wars” does not mean you should get bent out of shape or move quickly on an offer when you are really not ready. It’s a huge decision and an expensive one that shouldn’t be taken lightly. Make the decision that is right for you. And be prepared to live by it. 

Tips to help you win the deal: 

  • Be SURE to discuss any offer with your mortgage lender BEFORE writing the offer
  • Paying Cash? Have Proof of Funds ready to supply with your offer.
  • Know the comparable properties – this is what you pay a Realtor for.
  • Do not delay in making an appointment to see a hot new listing. Go now. Take time off work.
  • Do NOT assume a listing you like that has been languishing on the market will continue to sit there while you ponder. Remember…NEW BUYERS are hitting the market all the time and they might like the same house YOU do and be prepared to make a move
  • Know your budget (not just what you qualify to borrow) and make SURE you know what you are and are NOT willing to spend
  • Be ready to make an offer immediately if you like the house. Taking a night or two to “think about it” might be the kiss of death. REMEMBER THE TITLE OF THIS POST?!
  • Don’t get caught up in the auction-like atmosphere that can happen with multiple bids
  • Just because the tax value is significantly higher than the asking price DOES NOT mean you are getting a deal on the house.
  • Know that the home still has to appraise if you are getting a mortgage loan. Just because you are willing to spend more does not mean the bank will.

 


Tips for successful refinancing

TIPS FOR REFINANCING

Minneapolis, MN:  As homeowners rush to take advantage of the new HARP program and some of the lowest mortgage rates in history, it’s easy for them to get lost in the refinance stampede. That’s why it has never been so crucial for borrowers to understand the refinance game, and how to make the most of their application.

LENDERS OVERWHELMED
First, understand most lenders are overwhelmed with the high volume of refinance applications they have received since mortgage rates recently tumbled. Loans that went from application to closing in 30-days, are now running at least 45 days, and for most banks, upwards of 90-days. Online applications that were looked at within hours, now may take a few days before the lender calls you back.

MAKE GOOD LENDER CHOICES
Your mortgage lender choice is more important than most people realize. Generally speaking we suggest you deal with a local lender.  There is nothing some out-state lender advertising super low mortgage rates and with a fancy web site can offer that you can’t get down the street. Choosing your current lender very often is not the cheapest and easiest deal. Rather, just the opposite, as they know so many of their current clients call them without shopping.

ADVANCE PREPARATION
To speed up the process, borrowers should begin to assemble the standard loan paperwork as soon as they decide to apply for a loan. The minimum documentation for a mortgage loan everyone will need is; their two most recent pay stubs, or last two years tax returns if self-employed.  Their last two years W2’s, photo ID, and their last two banks statements.

DON’T DELAY
Once you lock a great interest rate, get the documents to the lender within a day. One missing document, or any delay by the borrower in providing s requested documents by the lender could easily add significant delay or problems with your refinance. As a borrower, you need to make sure once you lock an interest rates, you drop everything and respond to any lender request. Loan processing is first-in, first-out. Sign your paperwork within a day, and let the appraiser in your home as soon as humanly possible. Underwriting won’t even begin until they had your signatures and the appraisal in hand.

TALK TO THE LENDER
Borrowers should also ask their lenders upfront for a time frame on when they should expect to close on the refinance loan and lock their rate accordingly. Once the initial signatures and documents have been submitted, there will be a waiting period when there’s not much the loan officer and the borrower can do. Even during that time, borrowers should not be afraid to check on the progress of their refinance. Checking in once or twice a week is pretty reasonable to make sure your refinance application is on track. Underwriters may ask for additional documentation once they get to your file, so it’s important to stay in touch with your loan officer and be diligent.

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