If you have purchased or refinanced a home in the past 24 months, you know exactly what I am referring to. It seems in this day and age of mortgage lending you are being asked for more and more with each loan application. Banks are trying harder than ever to mitigate losses, and requiring a plethora of documentation is one result of this change.
I work closely with highly qualified borrowers on a daily basis and it is very difficult to ask for additional information from those with excellent credit. Individuals who are refinancing loans they qualified for three years ago with only a paystub and verification of employment are now being asked for substantially more documentation, and it’s confusing to them as to why.
All areas of a mortgage application factor into the decision, and it’s not as simple as investors tried to make it a few short years ago. The fours C’s of lending: Credit, Capacity, Collateral and Capital are terms you should know when applying for a home loan.
Credit — Your ability to prove you are a good credit risk for a lender.
Make all payments on time or as close to the due date as possible without fail.
Keep credit card balances as close to $0 as possible to earn maximum credit.
Make sure disputed items on your report are closed or no longer in dispute.
No credit is not good credit. Establish credit to represent your ability to make payments on a monthly basis.
Capacity — your ability to repay a loan based on your income and long-term debt.
Hourly: (40 hours/week and 52 weeks/year) Example: $15 an hour for 40 hours a week equals $600, while $600 a week times 52 weeks a year equals $31,200. Dividing that total by 12 months equals $2,600 gross a month.
Salary: Example: $60,000 gross a year divided by 12 months equals $5,000 gross a month.
Bi-weekly vs. bi-monthly payroll: With bi-weekly, you’re paid every two weeks for 26 pay periods a year. With bi-monthly, you are paid set dates for a total of 24 pay periods per year.
Overtime, bonus & commission income: A two-year history is desired for stability and likelihoood of continuance.
Non-reimbursed employee expenses: These are deducted from your gross annual income.
Self-employment income: There are many ways this is scrutinized by underwriters. If you’re self-employed and want home financing, speak with a trusted mortgage professional as early as possible to avoid any pitfalls.
Collateral – the real estate that secures the loan.
Homes with such adverse conditions as peeling paint, cracked windows, plumbing or electrical deficiencies or roof issues might by ineligible unless cured.
Condominium projects have different standards than single-family residences. They must meet minimum owner occupancy levels to be acceptable collateral. If a complex is overly saturated with investment property use, lenders may deny the application.
Income-producing properties such as those with a small orchard, grape vines, hay, large shops, etc. that produce any income reported on your tax return may be subject to loan denial. It may be considered “commercial” or “mixed use” and ineligible for FHA, Fannie or Freddie and USDA.
Capital — Your down payment. The assets listed on your loan application will be documented and must come from eligible sources.
All funds used for your down payment and closing costs must be sourced and seasoned to meet investor requirements. Cash is not verifiable, so get these funds in a verifiable account and seasoned for 60 days to be safe.
A paper trail and letters of explanation are required for “large” non-payroll deposits, as determined by your lender.
Gift funds will be documented by a gift letter, proof of receipt and verification of funds from the eligible donor.
Know the stipulations of liquidating or borrowing from a retirement account for your down payment.
All mortgages are scrutinized with intensity in today’s environment, so try not to take it personally. Underwriters now view every angle to protect their employers from defaults. It is wise to partner with an organization that looks out for the best interest of their clients and the future of their business. It is our commitment to help protect our community and educate consumers to help make the process as simple as possible and assist you in reaching your financial goals.