What Is A Pre-Approval?
Once you have committed to be a home buyer, you now need to get qualified to see whether you are qualified for a residential mortgage loan and if you are, how much you are approved for. You need to get a pre-approval letter from a mortgage lender in order to see homes. Sellers and seller’s realtors will not show properties if the home buyer is not armed with a solid pre-approval letter. Most sellers and seller’s realtors will no longer accept a pre-qualification letter and pre-qualification letters are becoming more and more extinct because nobody hardly accepts them anymore. Most mortgage lenders stop issuing pre-qualification letters altogether since they no longer carry any weight.
A pre-approval letter is a letter from a mortgage lender that states that he or she has reviewed the home buyer’s mortgage loan application and ran credit and determined that the mortgage loan applicant qualifies for a mortgage loan for a certain amount at a certain mortgage rate in a particular mortgage loan program, whether it is conventional, FHA, VA, USDA. A mortgage loan originator can decide to run the mortgage application and credit through Fannie Mae’s Automated Underwriting System to see if the applicant can get an approve/eligible per DU FINDINGS. Most mortgage loan originators will run through DU for mortgage loan applicants with challenging credit, low credit scores, and high debt to income ratios. An approve/eligible per DU FINDINGS carry a lot of weight and there are mortgage lenders where they have no mortgage lender overlays and will just go off DU FINDINGS. An approve/eligible is your final approval as long as you can provide conditions listed on the automated approval report. There are several factors that determine a pre-approval.
Credit Scores And Credit Report
There are minimum credit score requirements to qualify for a specific mortgage loan program. For example, for a home buyer to qualify for a 3.5% down payment FHA loan, the home buyer needs a minimum of a 580 FICO credit score. To qualify for a conventional loan, the minimum credit score required is 620 FICO credit score.
However, just meeting the minimum credit score requirement does not mean you automatically qualify for a mortgage loan. The mortgage lender also needs to review your credit report and see your overall payment history. Mortgage lenders do not want to see any late payment history in the past 12 months. Mortgage lenders also have mandatory waiting period after bankruptcy and foreclosure guidelines. Late payments after bankruptcy and foreclosure are frowned uponed, no matter how old the bankruptcy or foreclosure is. You mortgage loan originator will review your credit scores and credit report prior to issuing a pre-approval letter.
Income And Employment History
Your income is probably the most important factor in determining the amount of mortgage loan you qualify for. If you are self-employed or are a 1099 wage earner, two year tax returns will be required and reviewed by the mortgage loan originator prior to a pre-approval letter being issued. Self employed and 1099 wage earner’s income qualification calculations are tricky and needs to be thoroughly reviewed because most self employed and 1099 wage earners claim alot of unreimbursed expenses on their tax returns which lowers their adjusted gross income. Itemized deductions such as depreciation can be added back to income to boost the adjusted gross income. Part-time, bonus and overtime income cannot be used unless the mortgage loan applicant has had two years of part-time , bonus, and overtime income. Child support payments, disability, royalty income, social security income, and pension income can be used. In order for child support, alimony, disability, and royalty income to be used, the income needs to continue for the next three years.
Two year employment history is required. You do not have to have continous two years of employment history and do not have to be employed by the same employer for the past two years. Gaps in employments are allowed. If you have been unemployed for six months or less and just got a new full time job, your new wage on the new full time job will be used for income calculation and the only seasoning period to qualify for a mortgage loan is that you need to provide 30 days of your pay check stub prior to closing. If you have been unemployed for six or more months, you need to be employed in your new full time job for at least six months before you can qualify for a mortgage loan.
Must Meet Debt To Income Ratios
You can have perfect credit and good income but if you have too much monthly debt obligations, your debt to income ratio may exceed the mandatory maximum debt to income ratio requirements. The maximum debt to income ratio to qualify for a FHA loan is 56.9% DTI. The maximum debt to income ratio to qualify for a conventional loan is 45% DTI. Debt to income ratio is calculated by adding the sum of all of your monthly minimum debt payments, including your new proposed housing payment, and dividing it by the mortgage loan applicant’s total monthly gross income. If your debt to income ratio exceeds the maximum allowed, there are options you can take to lower the debt to income ratio so you meet the debt to income ratio guidelines. Some ways of lowering your debt to income ratios and qualifying for a mortgage loan is by paying down your credit cards, paying off certain credit items, or getting a non-occupant co-borrower. FHA allows a home buyer to add a non-occupant co-borrower to qualify for income but the non-occupant co-borrower needs to be a relative or family member. The non-occupant co-borrower goes on the mortgage note but not on title.
Down Payment And Closing Costs
Before a mortgage loan originator will issue a pre-approval letter, the mortgage loan originator will want to see where the down payment and closing costs will come from. The loan officer will ask you how much money you have in the bank as well as all of your asset information such as whether you have an investment account, retirement account, or any other liquid assets. Down payment requirements vary depending on the mortgage loan program. Closing costs vary from county to county and they are third party charges such as title charges, recording fees, appraisal fees, attorneys fees, and other costs and fees associated with the home purchase and closing the mortgage loan. If you do not have your own funds for the down payment, FHA allows a family member to gift you 100% of the down payment but the gift funds cannot be paid back and cannot be a loan. A gift letter from both the home buyer and the gift donor needs to be signed.
Sellers Concessions And Lenders Concessions
Most home buyers do not have to worry about closing costs. A home buyer can get a sellers concession towards a buyer’s closing costs. Most sellers have no problem with giving a home buyer a seller’s concession towards their closing costs. The maximum sellers concession towards a buyers closing costs allowed for FHA loans is 6% and the maximum sellers concession towards a home buyers closing costs allowed for a conventional loan is 3%.
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