Income And Credit Mortgage Guidelines

Income and Credit Mortgage Guidelines on Home Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover income and credit mortgage guidelines on home loans. There are three main factors in getting mortgage approval:

  1. Income
  2. Debt
  3. Credit

All three of these factors are crucial in getting a home buyer to qualify for a mortgage loan. Every one of these three criteria is thoroughly analyzed by mortgage underwriters. To proceed with the mortgage process, a mortgage loan applicant needs to get approve/eligible per the Automated Underwriting System.

The Automated Underwriting System

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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. In this article, we will discuss and cover Income And Credit Mortgage Guidelines On Home Loans.

Mortgage Conditions By The Automated Underwriting System

The Automated Underwriting System is the determinant factor of 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 are 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, and credit scores, in a matter of minutes and render its decision.

The three results are the following:

  • 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 need 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 Most Important For Loan Approval

Income is the most important factor in 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 mortgage approval. Borrowers can have perfect credit but without qualified income, they cannot get a mortgage loan approval.

No-Doc and Stated-Income Mortgage Loans

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No-doc, stated-income, and no income verification are now back in full force.  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 of Income And Credit Mortgage Guidelines On Documented Qualified Income

Many workers 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 for.   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.

Borrowers With Less Than Two-Year Employment History

Borrowers do not need to have a 2-year work history to qualify for a residential mortgage loan. Changes in jobs are permitted as well as gaps in employment. Borrowers who have been unemployed for six months or less and started a new full-time job can qualify for a mortgage loan.

Mortgage With Gaps in Employment Guidelines

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Before borrowers close on their home loan, lenders require to see 30 days of paycheck stubs from new employers. Borrowers with extended leave from the workforce, unemployed for longer than 6 months, lenders will require borrowers to be in a 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 to worry about.

1099 Versus W-2 Wage Earners Mortgage Guidelines

What is the difference between 1099 Compared to W-2 for salariers? 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 is the same, and/or if most of the income year 1099 income is the same and/or greater than the prior year. If the most recent 1099 income is less than the prior 1099 income then the lesser of the two-year 1099 income will be used

Can I Use Overtime Income To Qualify For a Mortgage

Overtime income can be used with consistent overtime income for the past two years at the same job. Overtime needs likely to continue for the next three years. A written verification of employment stating these facts will be required in order for the borrower to be able to use overtime income.

Part-Time And Other Qualified Income

Part-time income can be used if and only if the borrower has had the same part-time job for the past two years. The part-time income is likely to continue for the next three years. Verification of employment will be required to confirm 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.

Social Security, Pension, and Other Income Mortgage Guidelines

In this section, we will go over case scenarios where borrowers can potentially use social security, pension, and other income and be able to gross up the income to qualify for a mortgage.

For example, here is a case scenario:

  • if the 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

Income Tax Returns Requirements For Mortgage Process

Along with W-2s and/or 1099s, lenders will want to see two years of tax returns and look for unreimbursed expenses. Unreimbursed expenses will be deducted from the 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 do not require non-occupant co-borrowers to be family members. Non-occupant co-borrowers do not go on the title but will be on the mortgage note.

Income And Credit Mortgage Guidelines And Debt 

The 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 the borrower’s debt-to-income ratios. Monthly debts include minimum credit card payments, auto loans, student loans, child support payments, alimony payments, and any other minimum payments used in DTI Calculations.

Qualifying For a Mortgage With a Car Payment

Car payments are often a problem. This is 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

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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 allow for Income Based Repayment (IBR) to be used as long as it reports to all three credit bureaus.

FHA and USDA Deferred Student Loan Guidelines

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FHA and USDA, look at student loans differently. Even if student loans are deferred, lenders need to take 0.50% of the student loan balance and use that as a hypothetical monthly debt. The 0.50% of the outstanding student loan balance will be used towards the 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 payments as a hypothetical debt.

Short-Term Installment Loans

What are the guidelines for granting loans

Borrowers with an automobile loan that has less than 10 months in payments can deduct that monthly payment 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 can offset this monthly payment. This debt is exempted by co-signers by providing 12 months of canceled checks from the main borrower who is paying on the loan. Typical loans that this case scenario applies are car loans and student loan payments.

Non-Occupant Co-Borrowers Mortgage Guidelines

Co-signers/borrowers for family members and/or relatives/friends on a car, home, or student loan are not responsible for the payment if they can prove the main borrower is making payments. Lenders require 12 months of canceled 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 the borrower to qualify for a 3.5% down payment home purchase.

The debt-to-income ratios are lowered to 43% debt-to-income ratios for borrowers if they have credit scores under 620 FICO. If a 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

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HUD allows having open collections and prior derogatory credit. However, late payments in the past 12 months can be a problem. Late Payments in the 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, the mandatory waiting period after bankruptcy is 2 years from the discharge date of Chapter 7 bankruptcy. The Waiting Period is 2 years on VA loans. 3 years for USDA loans. The 4-year waiting period after Chapter 7 Bankruptcy discharged date for conventional loans.

FHA and VA Loans While on Chapter 13 Bankruptcy

Borrowers can qualify for FHA and VA loans one year into their Chapter 13 Bankruptcy Repayment Plan with Trustee Approval. No waiting period after the Chapter 13 Bankruptcy discharge date on VA and FHA loans. The two-year waiting period after Chapter 13 Bankruptcy discharged date on conventional loans.

Fannie Mae Waiting Period After Bankruptcy and Foreclosure

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

What are the minimum credit ratings for conventional loans

The minimum credit score requirement 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, unlike government loans. For FHA loans, everyone with a 640 credit score normally gets the same mortgage rate.

Income And Credit Mortgage Guidelines On FHA 203k Loans

Per Income And Credit Mortgage Guidelines minimum credit score requirement 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.

Down Payment Requirements on a Home Purchase

Per Income and Credit Mortgage Guidelines minimum credit score requirement 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 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 offers Jumbo Loans With a 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 to 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 no active credit accounts, just 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 to improve credit scores right away.

This BLOG On Income And Credit Mortgage Guidelines Was UPDATED on September 28th, 2022

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