Income And Credit Mortgage Guidelines On Home Loans

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Income And Credit Mortgage Guidelines On Home Loans

This BLOG On Income And Credit Mortgage Guidelines On Home Loans Was UPDATED On October 24th, 2018

There are three main factors in getting a mortgage approval:

  1. Income
  2. Debt
  3. Credit

All three of these factors are crucial in getting a home buyer qualified for a mortgage loan:

  • Every one of these three criteria are thoroughly analyzed by the mortgage underwriters
  • To proceed with the mortgage process, a mortgage loan applicant needs to get an approve/eligible per the Automated Underwriting System
  • It is not a person that initially analyzes and scrutinizes the mortgage application
  • The loan officer gathers data
  • It is the Automated Underwriting System, also known as the AUS, that will determine whether or not the mortgage loan applicant gets an automated approval
  • The Automated Underwriting System is the determinant factor whether a mortgage loan applicant can qualify with the following factors:
    • recent late payment
    • gift funds
    • whether a rental verification is needed
    • whether the debt to income ratios are too high
    • or whether there is enough credit tradelines to justify an automated approval

Income And Credit Mortgage Guidelines On Automated Underwriting System

The Automated Underwriting System is a sophisticated system that will analyze a mortgage loan application, credit report, credit scores, in a matter of minutes and render its decision.

  • The three results are approve/eligible, referred/eligible, referred with caution
  • Referred/eligible DU FINDINGS, or LP FINDINGS can be manually underwritten
  • DU stands for Desktop Underwriter which is Fannie Mae’s version of the Automated Underwriting System
  • LP stands for Loan Prospector which is Freddie Mac’s version of the Automated Underwriting System
  • All DU FINDINGS and LP FINDINGS needs to be confirmed by a human mortgage underwriter
  • The three main factors, Income, debt, and credit, will be thoroughly analyzed and scrutinized by underwriters

Income And Credit Mortgage Guidelines Is Most Important Of Loan Approval

Income is the most important factor of Income And Credit Mortgage Guidelines considered for the mortgage approval process.

  • Borrowers can have poor credit but as long as they have income, they can get a mortgage approval
  • Borrowers can have perfect credit but without qualified income, they cannot get a mortgage loan approval
  • Days of no doc, stated income, no income verification have long been gone
  • Income is the most important factor in the mortgage qualification process
  • All income must be documented and sourced and verified by underwriters in order to be used in qualifying borrowers
  • Cash income is non existent in the mortgage industry

Importance Income And Credit Mortgage Guidelines On Documented Qualified Income

Many workers who get paid cash income. They cannot use one red cent of cash in the mortgage qualification process.  W-2 income is the easiest income to qualify.   W-2 employees can be salaried employees or hourly employees.

Per Income And Credit Mortgage Guidelines here are how W-2 employees income is qualified for the mortgage qualification and approval process.

  • Most lenders want to see a 2 year work history from the same company
  • However, borrowers do not need to have a 2 year work history to qualify for a residential mortgage loan
  • Changes in jobs is permitted as well as gaps in employments
  • Borrowers who have been unemployed for six months or less and started a new full time job, they can qualify for a mortgage loan
  • But before borrowers close on their home loan, lenders require to see 30 days of paycheck stubs from new employer.
  • Borrowers with extended leave from the work force, unemployed for longer than 6 months, lenders will require borrowers to be current full time job for at least 6 months
  • This is required in order to count full time employment income
  • Lenders will like to see that you are in the same field of employment
  • However, there are many lenders that will consider career changes
  • This is something most borrowers do need not worry about

1099 Versus W-2 Wage Earners Mortgage Guidelines

Bad news for 1099 income employees.

  • 1099 income wage earners need to provide two consecutive years of tax returns
  • The two tax returns income is averaged only if income for both years are the same, and/or if most income year 1099 income is  same and/or or greater than prior year
  • If most recent 1099 income is less than the prior 1099 income, than the lesser of the two year 1099 income will be used
  • Overtime income: 
    • Overtime income can be used with consistent overtime income for the past two years at the same job
    • Overtime needs to likely to continue for the next three years
    • A written verification of employment stating these fact will be required in order for borrower to be able to use overtime income
  • Part time income can be used if and only if borrower has the same part time job for the past two years
  • The part time income is likely to continue for the next three years
  • A verification of employment will be required confirming these circumstances
  • Social security income can be used for mortgage qualification and approval process
  • Social security income can be grossed up by 15% as long as it is not taxable
  • For example, here is case scenario:
    • if borrower has $1,000 per month in social security income
    • they can gross this $1,000 net social security income by 15% which yields $1,150
    • The $1,150 income will be used for qualifying
  • Pension income: 
    • Net pension income can be used and can be grossed up by 15% just like social security income
  • Child support and alimony income: 
    • Child support and alimony income can be used as long as borrowers can provide written documentation
    • Documentation needs to support child support and/or alimony income will continue for the next three years

Along with W-2s and/or 1099’s, lenders will want to see two years tax returns and look for unreimbursed expenses.

  • Unreimbursed expenses will be deducted from income
  • This can pose a problem when it comes to calculating qualified and affect debt to income ratios
  • If for some reason borrowers do not qualify due to higher debt to income ratios due to a shortage of income, HUD/Fannie Mae allows non-occupant co-borrowers
  • Non-occupant co-borrowers need to be family members or relatives on FHA Loans
  • Conventional Loans does not require non-occupant co-borrowers to be family member
  • Non-occupant co-borrowers do not go on title but will be on the mortgage note

Income And Credit Mortgage Guidelines And Debt 

Borrower’s debt will be thoroughly analyzed:

  • Debt is a major factor in the mortgage qualification process
  • Can affect borrower’s qualifying debt to income ratios
  • Any monthly minimum debt payment is figured in when qualifying borrower’s debt to income ratios
  • Monthly debts include minimum credit card payment, auto loan, student loans, child support payments, alimony payments, and any other minimum payments are used in DTI Calculations
  • Car payments are often a problem
  • This because an average new car payment is $400 per month
  • A $400 car payment is equivalent to a $100,000 mortgage payment
  • Many folks with two car payments are forced in buying a lesser priced home than they would otherwise have purchased without the auto loan payments
  • There are ways of seeing whether or not you can eliminate debts from your mortgage qualification process

Deferred Student Loans

VA allows deferred student loans that have been deferred for at least 12 months not to count towards debt in the mortgage qualification process on VA Loans.  This is not the case with FHA and USDA Loans:

  • Conventional loan programs allows for Income Based Repayment (IBR) to be used as long as it reports to all three credit bureaus
  • With FHA and USDA, they look at student loans differently
  • Even if student loans are deferred, lenders need to take 1% of student loan balance and use that as a hypothetical monthly debt
  • The 1% of outstanding student loan balance will be used towards student loan minimum monthly payment in calculating debt to income ratios
  • This holds true even though consumers are not making any monthly student loan payments
  • Lenders will use it towards monthly debt payment as a hypothetical debt

Short Term Installment Loans

Borrowers with an automobile loan that has less than 10 months in payments can deduct that monthly payments towards calculating this payment in mortgage qualification of debt to income ratios.

  • The automobile loan needs to be a purchase loan and not a lease
  • Lease automobile monthly payments will count
  • Lenders view those who are leasing a vehicle will re-lease another vehicle once their lease is up

All minimum credit card payments will count towards monthly debt payments in calculating debt to income ratios.  Borrowers exceeding the required debt to income ratios, paying off credit cards might reduce high debt to income ratios.

Co-Signer On Debt Lending Guidelines

Co-signers on a loan where the co-signer is not paying on that loan but the main borrower is can offset this monthly payment :

  • This debt is exempt by co-signers by providing 12 months cancelled checks from the main borrower who is paying on the loan
  • Typical loans that this case scenario apply are car loans and student loan payments
  • Co-signers/borrowers for family members and/or relative/friends on a car, home, student loan are not responsible for the payment if they can prove main borrower is making payments
  • Lenders require 12 months cancelled checks to prove that someone else is making the monthly minimum debt payment

Credit In Mortgage Qualification Process

Credit is a major factor and the deciding factor whether or not borrowers qualify for a mortgage loan program.

  • FHA, VA, USDA, and Conventional mortgage loan programs all have different mortgage lending guidelines when it comes to credit
  • FHA loans require a minimum of a 580 credit score in order for borrower to qualify for a 3.5% down payment home purchase
  • However, the debt to income ratios are lowered at 43% debt to income ratios for borrowers if they have credit scores under 620 FICO
  • If borrower has a credit score of over 620 FICO, then the debt to income ratio can go up to 46.9% front end and 56.9% back debt to income ratios

Waiting Period And Collections Mortgage Guidelines

HUD allows to have open collections and prior derogatory credit.

  • However, late payments in the past 12 months can be a problem
  • Late Payments in prior 12 months may cause a denial per DU FINDINGS and/or LP FINDINGS
  • There are mandatory waiting periods after a bankruptcy and/or foreclosure for mortgage loan programs
  • For FHA loans, mandatory waiting period after a bankruptcy is 2 years from the discharge date of Chapter 7 bankruptcy
    • Waiting Period is 2 years on VA Loans
    • 3 years for USDA Loans
    • 4 year waiting period after Chapter 7 Bankruptcy discharged date for conventional loans
  • Borrowers can qualify for FHA and VA Loans one year into their Chapter 13 Bankruptcy Repayment Plan with Trustee Approval
  • No waiting period after Chapter 13 Bankruptcy discharged date on VA and FHA Loans
  • Two year waiting period after Chapter 13 Bankruptcy discharged date on conventional loans
  • Four year wait period after Chapter 13 Dismissal Date on conventional loans
  • There is a three year waiting period after the recorded date of the foreclosure or the date of the sheriff’s sale for those with a prior foreclosure and/or deed in lieu of foreclosure
  • There is a mandatory three year waiting period after the date of a short sale reflected on the HUD’s settlement statement

Minimum Credit Scores On Conventional Loans

Minimum credit score requirements to qualify for a conventional loan is 620 FICO.

  • Conventional loans are credit sensitive
  • To get the best conventional mortgage rate your credit scores need to be at 760 FICO or higher
  • The lower credit scores are, the higher mortgage rate consumers will get quoted with unlike government loans
  • For FHA loans, everyone with a 640 credit score normally get the same mortgage rate

Income And Credit Mortgage Guidelines On FHA 203k Loans

Per Income And Credit Mortgage Guidelines minimum credit score requirements for 203K loans is 580 FICO.

  • Income And Credit Mortgage Guidelines on Minimum credit score requirements for HomePath loans were 660 FICO
  • However, Fannie Mae discontinued Fannie Mae HomePath Loans back in 2014
  • Per Income and Credit Mortgage Guidelines minimum credit score requirements for USDA loans is 580
  • Per Income And Credit Mortgage Guidelines minimum credit score requirements for condotel mortgage loans and non-warrantable condominium loans is at 680 FICO
  • To get premium pricing on Jumbo Loans which are capped at 95% loan to value, a minimum credit score of 720

Gustan Cho Associates at Loan Cabin Inc. offers Jumbo Loans With 5% Down Payment And No Mortgage Insurance .

Income And Credit Mortgage Guidelines With Low Credit Scores

Just because credit scores are low does not mean borrowers will not qualify for a particular mortgage loan program.  As long as borrowers have the income and debt is in line and qualify with debt to income ratios, boosting credit scores can be an easy fix.  There are quick fixes in improving credit scores.  Just paying down credit cards to a 10% balance of credit limit can improve credit scores in a matter of no time.  For those who have little or not active credit accounts, just by adding new secured credit cards or new credit can have a dramatic positive effect on credit scores.  Most experienced mortgage loan originators know quick fixes on improving credit scores right away.

This BLOG On Income And Credit Mortgage Guidelines Was UPDATED On October 24th, 2018

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