Gustan Cho Associates created this blog and guide on mortgage guidelines 101 for borrowers and new loan officers. The mortgage business can be tricky and overwhelming not just for borrowers but also for new loan officers. We have written this BLOG on Mortgage Guidelines 101 not just for borrowers but also for loan officers in a simplified format on key points so they can comprehend.
Over 75% of Our Borrowers Are Folks Who Got Denied At Other Mortgage Companies
Over 75% of my borrowers at Gustan Cho Associates are folks who either got a last-minute mortgage loan denial or are going through a stressful mortgage process. This is for one reason and one reason only. The borrower was not properly qualified by their loan officer and the loan officer did not know two important things:
- The loan officer did not know the guidelines before issuing a pre-approval.
- The loan officer did not know their own company’s lender overlays before issuing the pre-approval letter.
Reason For Last-Minute Mortgage Loan Denials
There is no reason why a pre-approved borrower cannot close on their home loan and close it on time. Gustan Cho Associates close our borrower’s loans in 21 days or less. We have no overlays on government and conventional loans. We have a track record of closing 100% of our pre-approvals and closing them on time. I would also like to congratulate the new members of Gustan Cho Associates on passing the rigorous NMLS Examination and becoming a member of our growing successful mortgage team. Also, like to welcome those loan officers who are planning on joining Gustan Cho Associates Mortgage Group.
Becoming A Loan Officer
Becoming a licensed mortgage loan originator does take time. The first thing you need to do is go to NMLS Resource Center and register and obtain an NMLS Unique Identifier Number. That number will be your permanent number. Loan Officers will use it throughout their careers as licensed mortgage loan originators. The next step is to take the 20-hour pre-licensing NMLS approved course and pass the course. Loan Officer Candidates can choose any school of their choice as long as it is NMLS approved. The next step is to take and pass the rigorous 125 questions, 3-hour national NMLS exam. You will need a score of 75% in order for you to pass the NMLS Test. The exam is not easy and the best way to prepare for the exam is to take as many practice tests as possible. You should go over 3,000 plus test questions before taking the NMLS Exam.
Retaking The NMLS Exam If You Failed The First Time
If you fail the NMLS exam the first time around, you have two more chances to take them. You need to wait 30 days before you can retake the test. If you fail the NMLS exam three times in a row, you need to wait six months to be able to retake the NMLS exam. Once you have passed the NMLS Exam, you will have to apply for the individual state licenses to be able to originate loans in that particular state. You will need to go through a federal criminal background check by the FBI as well as the state police background criminal background check for every state you apply for. There will be a credit check required as well.
Obtaining Your NMLS License
You will need a sponsoring company that needs to sponsor you. Once you have completed the above steps, you are now officially a licensed mortgage loan originator and can start training with us. Mortgage 101 For New Loan Officers was written by Michael Gracz to welcome newer loan officers who just passed their exams and background checks and are now employed and ready to do business and originate mortgage loans. I have trained many mortgage loan originators, both new to the business and experienced loan officers on not just originating loans but also taking their business and career to the next level. I also advise and mentor many new loan officers, especially those who are preparing for their NMLS exam. I advise test takers only to worry about what is on the test study materials and not worry about whether it is true in real life. Theory versus reality?
Mortgage Guidelines 101 On Theory Versus Reality
Much information that is on the test materials is not true in reality. For example, on the NMLS exam, the required debt to income ratio requirements for FHA Loans is 28% front end debt to income ratio and 36% back end debt to income ratio. This is totally wrong. In reality, the actual front debt to income ratio on FHA loans is 46.9% DTI and the back-end debt to income ratio is 56.9% DTI for borrowers with credit scores of 620 FICO or higher. For borrowers with credit scores of under 620 FICO, the maximum debt to income ratio permitted to get an approve eligible is 43% DTI. In this blog on Mortgage Guidelines 101 For New Loan Officers, I will cover the basics in qualifying a mortgage loan applicant.
Minimum Credit Scores Required Versus Credit Payment History
Gustan Cho Associates is a fabulous company. We are a five-star national company licensed in multiple states with a rock-solid reputation of no overlays and closing loans in 21 days.
Here is what Gustan Cho Associates has to offer and why you would want to join our growing team:
- Gustan Cho Associates has a no lender overlays on business model on government and conventional loans.
- NEXA Mortgage, LLC dba Gustan Cho Associates NMLS 1660690 is licensed in 48 states and has wholesale lending relationships with over 160 lenders.
- You will have every mortgage loan program in the marketplace to offer your clients.
- Gustan Cho Associates will only deal with wholesale lenders who just goes off the automated findings per Automated Underwriting System and with no lender overlays
- I will be covering our mortgage lending guidelines in this article on Mortgage 101 For New Loan Officers
- The minimum credit scores required on a 3.5% down payment home purchase FHA loan is 580 FICO
- We have no overlays on VA loans and all that is required is a 580 FICO on VA loans
- There is no debt to income ratio requirement nor caps on VA loans
- Just go off findings
Credit Score Requirements Of Borrowers
Gustan Cho Associates has partnerships with wholesale lenders with no overlays on credit scores and will accept the following:
- Every consumer normally has three credit scores
- The credit scores that we use to qualify a borrower is the middle of the three credit scores
For example, here is a case scenario:
- if a borrower has a 500 FICO credit score with Experian
- 600 FICO credit score with TransUnion
- 700 FICO credit score with Experian
we will use the 600 FICO credit score of TransUnion because that is the middle credit score.
Qualifying Mortgage Borrowers And Pre-Approval Process
One of the most important things that loan officers should note is that just because borrower meets the minimum credit scores does not automatically qualify them for an FHA loan. Need to thoroughly review the borrower’s credit report and look at the overall credit history. It is not a deal killer for a borrower to have prior bad credit, open collections, judgments, tax liens, charge-offs, or other derogatory credit information on their credit report. Borrowers do not have to pay off outstanding collections or charge offs to qualify for an FHA or VA Loan because of its no overlay policy. Consumers can go through periods of bad credit due to loss of a job, loss of business, divorce, sickness, or other extenuating circumstances. However, lenders want to see that the borrower has re-established credit and has been timely with all of their payments in the past 12 months and re-established credit after periods of bad credit.
How Do Mortgage Underwriters View Recent Late Payments
One late payment in the past 12 months is not a deal killer. However, if a borrower has multiple late payments in the past 12 months, they may need to wait until they have been timely in the past 12 months before proceeding with the mortgage process. With FHA loans, there is a correlation between credit scores and debt-to-income ratios. As mentioned earlier, if your borrower has at least a 620 FICO credit score, the maximum back-end debt to income ratio allowed is 56.9% with FHA loans. DTI and the maximum front-end debt to income ratio allowed are 46.9% DTI.
Qualifying For A Mortgage With Bad Credit
If borrowers’ credit scores are under 620 FICO, then the maximum debt to income ratio allowed is 43% DTI with FHA loans. The above ratios are what is needed to get an approve/eligible per Automated Underwriting System. There is no debt to income ratio requirements with VA loans. Gustan Cho Associates will just go off findings. Gustan Cho Associates does not have any minimum credit score requirements or debt to income ratio requirements on. VA Home Loans.
Verification Of Rent
Verification Of Rent is one of the most important compensating factors a borrower can have. This holds true because it determines payment shock. In most cases where a borrower has credit scores under 620 FICO credit scores, the AUS, Automated Underwriting System, may request verification of rent. Verification of Rent is only valid if the renter can provide 12 months canceled checks that have been paid timely to his or her landlord/ Or 12 months bank statements showing that the exact rent amount has been transferred to the landlord’s bank account. If the renter has been renting the property from a registered property management company, then verification of rent form completed and signed by the property manager can be used in lieu of canceled checks and/or bank statements. The VOR form will be provided by the lender. All VA and/or FHA manual underwriting files will require verification of rent. Those who cannot provide VOR can get an exemption by us by completing a rent-free living with a family letter.
FHA Loan After Bankruptcy and/or Housing Event
Borrowers can qualify for an FHA loan after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale, however, there is a mandatory waiting period after bankruptcy and foreclosure to qualify for an FHA loan as well as other mortgage loan programs. There is a two-year mandatory waiting period of 2 years after a Chapter 7 Bankruptcy discharged date to qualify for an FHA loan.
FHA Loan During Chapter 13 Bankruptcy Repayment Plan
The borrower can qualify for an FHA loan if they are one year into a Chapter 13 Bankruptcy repayment plan. This holds true as long as they have been timely with all of their payments for the past 12 months. Need to get the Chapter 13 Bankruptcy Trustee’s approval for a mortgage. However, it needs to be a manual underwrite. Borrowers can qualify for an FHA loan with no waiting period after a Chapter 13 Bankruptcy discharged date. If the Chapter 13 Bankruptcy discharge has been seasoned for less than 2 years, then it needs to be a manual underwrite.
FHA Loan After Foreclosure and/or Other Housing Event
There is a three-year mandatory waiting period to qualify for an FHA loan after the recorded date of a foreclosure or deed in lieu of foreclosure. The three-year waiting period starts from the actual recorded date where the borrower’s name has been transferred out of the deed. And/or date of the sheriff’s sale and not the date where the homeowner has surrendered the property to the lender. There is a three-year waiting period to qualify for an FHA loan after the date of a short sale.
Late Payments After Bankruptcy And Foreclosure
Mortgage 101 For New Loan Officers: Mortgage lenders do not want to see any late payments after a bankruptcy or foreclosure. Any late payments after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale is considered extremely bad. These folks are considered repeat offenders from a lender’s point of view. Most lenders will automatically disqualify anyone with late payments after bankruptcy and/or foreclosure. One or two late payments after a bankruptcy or foreclosure may not be a deal killer. But consistent late payments will be considered a total disregard for credit and the chances are that these borrowers will have a hard time qualifying for any mortgage loan program.
Late Payments After Bankruptcy and Foreclosure
It is not recommended that you hire a credit repair company. Whatever credit repair company does, you can do it yourself. Or better yet, your loan officer will help you rebuild, reestablish, and repair your credit for no charge. A credit repair regimen with your loan officer is often recommended. Contact us at Gustan Cho Associates if you have borrowers with late payments after bankruptcy and/or foreclosure. I will direct you to the proper person to help these borrowers so they can qualify for a mortgage.
Mortgage Guidelines 101 on Collection Accounts and Charge Off Accounts
Mortgage Guidelines 101 For New Loan Officers: FHA does not require borrowers to pay off outstanding collection accounts and charge off accounts to qualify for FHA loans. Many banks and mortgage companies have lender overlays that require all charge-off accounts and outstanding collection accounts to be paid off. Our company at Gustan Cho Associates does not require collection accounts and/or charge-off accounts to be paid off as per FHA Guidelines On Collection Accounts And Charge Off Accounts. However, loan officers should note that FHA does categorize collection accounts into three categories and outstanding collection accounts will impact debt to income ratio calculations on non-medical collection accounts.
- Non-Medical Collection Accounts
- Medical Collection Accounts
- Charge Off Accounts
Can You Qualify For FHA Loan With Outstanding Collections & Charge Offs?
FHA borrowers can qualify for FHA Loans with outstanding non-medical collection accounts. Gustan Cho Associates Mortgage does not have any overlays with regards to Outstanding Unpaid Collections and Charge Offs.In this section, we will discuss and cover the rules and guidelines with regards to unpaid outstanding collections and charge-offs. If the sum of all of the non-medical collection account unpaid balance exceeds $2,000, then FHA requires that 5% of the unpaid outstanding non-medical collection account balance be taken into account and used as a monthly expense of the borrower. The 5% of the outstanding collection account balance will be used in the debt to income ratio calculations by the mortgage underwriter. This holds true even though the borrower does not have to pay for it/ The 5% figure is just a hypothetical number used for debt to income ratio calculations.
Mortgage Guidelines 101: Case Scenario
For example, let’s say that a borrower has $10,000 in unpaid outstanding collection accounts. The borrower is not required to pay any of it off. FHA will require the underwriter to take 5% of the unpaid outstanding $10,000 in the collection account balance. Or $500 and use that as a monthly expense of the borrower and be used in the calculations of the debt to income ratio of the borrower.
FHA Loan With Large Collection Account Balance
If the outstanding non-medical collection account balance is a large balance, FHA WILL allow the borrower to enter into a written payment agreement with the creditor and/or collection agency. They can use the agreed-upon figure in lieu of 5% of the outstanding collection account balance. So in the above example, if the $500 monthly payment is too much and will disqualify the borrower because it exceeds the debt to income ratio allowed, the borrower can enter into a $100 per month written payment agreement with the creditor. And the $100 per month will be used in lieu of the $500. The above rule does not apply to charge-off accounts and medical collection accounts. Medical collections and charge-off accounts are exempt from debt to income ratio calculations no matter how much the outstanding unpaid collection account balance is.
Mortgage Guidelines 101: Credit Disputes
Mortgage Guidelines 101 On Credit Disputes. Many consumers go through credit repair. The most common of doing credit repair is by disputing derogatory credit items. Whenever you do a credit dispute with the credit bureaus, the credit bureaus will note that the disputed item is in dispute. This can create a halt of the mortgage process.
Mortgage Guidelines 101: Non-Medical Collections
Cannot have any credit disputes on any non-medical collection accounts with balances that are greater than $1,000 ( the sum of all of your non-medical collection accounts ): Need to retract those credit disputes and the credit report needs to reflect that those items are no longer in dispute.
Mortgage Guidelines 101 on Credit Disputes on Medical Collections
Can have credit disputes on non-medical derogatory credit items that have zero balances. If the total sum of collection account balances from a credit report is less than $1,000. Cannot have any credit disputes on charge off accounts, no matter how small or large the balance is. Consumers are ALLOWED to have credit disputes on medical collections no matter how much the collection account balance is. Another issue is that when a borrower retracts a credit dispute, the borrower’s credit scores normally drop. Loan officers should not issue a pre-approval letter if the borrower has credit disputes until the credit disputes are retracted.
Mortgage Guidelines 101 In Gaps In Employment
Mortgage 101 For New Loan Officers with Gaps In Employment. With our company, you do not need a two-year straight same employment history to qualify for an FHA loan. As long as you have an overall two-year employment history, you are fine.
Can I Qualify For A Mortgage If I had Gaps In Employment in the Past 2 Years?
Can have gaps in employment in the past two years. If you had an employment gap of six or more months and just have a new full-time job, then you need to stay at your new full-time job for at least six months in order for you to qualify for an FHA loan. If you had gaps in employment for less than six months the following guidelines apply: you will qualify for an FHA loan right away with verification of employment but cannot close on your home loan unless you have provided the mortgage underwriter at least 30 days of paycheck stubs on a new job
Mortgage Guidelines 101 On Income Qualification
One of the most important topics and knowledge all loan officers have to cover is the ins and outs of income qualification. Income qualification is the most important factor when it comes to pre-qualifying and pre-approving a borrower. Borrowers with part-time income, bonus income, overtime income, you can use this as qualified income. The borrowers need a two-year history. The borrower needs to show the borrower’s job ist likelihood to continue for the next three years is very likely. If you have two full-time jobs, you can only use both full-time job incomes if you have been employed at both full-time jobs for two years. you have less than a two-year employment history on one of the full-time jobs, then only one full-time job can be used as a qualified income.
Mortgage Guidelines 101: Going From 1099 To W2 Wage Earner Status
If you are a self-employed and/or a 1099 wage earner borrower, then two-year tax returns are required, and two-year of self-employment history. If you go from a W2 wage earner to a 1099 wage earner, then two-year 1099 wage earner employment history is required.
If you go from 1099 wage earner status to W2 wage earner status the following applies:
- then you can qualify for an FHA loan right away with verification of employment
- and an employment offer letter
- but cannot close on your FHA loan until 30 days of paycheck stubs have been provided.
The team at Gustan Cho Associates will continue with future blogs for newer loan officers. Please feel free to comment below or email us at gcho@gustancho.com for your feedback.
