Mortgage Approval

There are three main factors in getting a mortgage approval:  Income, Debt, Credit.  All three of these factors are crucial in getting a home buyer qualified for a mortgage loan and every one of these three criterias are thoroughly analyzed by the mortgage loan underwriter.  To proceed with the mortgage approval 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.  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 a 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.

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 and 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 loan underwriter and the three main factors, Income, debt, and credit, will be thoroughly analyzed and scrutinized by the mortgage loan underwriter.

Income: Most Important Of 3 Mortgage Approval Factors

Income is the most important factor of the three underwriting factors considered for the mortgage approval process.  You can have poor credit but as long as you have income, you can get a mortgage approval.  You can have perfect credit but if you do not have income, you 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 the mortgage loan underwriter in order to be used in the mortgage qualification and mortgage approval process.  Cash income is non existent in the mortgage industry.  Many workers who get paid cash income cannot use one red cent in the mortgage qualification process.  W-2 income is the easiest income to qualify.   W-2 employees can be salaried employees or hourly employees.  Here are how W-2 employees income is qualified for the mortgage qualification and mortgage approval process.

1.  Most mortgage lenders want to see a 2 year work history from the same company.  However, you do not need to have a 2 year work history from the same company to qualify for a residential mortgage loan.  Changes in jobs is permitted as well as gaps in employments.

2.  If you have been unemployed for six months or less and started a new full time job, you can qualify for a mortgage loan but before you close on your residential mortgage loan, the mortgage lender will require to see 30 days of paycheck stubs from your new employer.

3.  If you have had an extended leave from the work force, unemployed for longer than 6 months, mortgage lenders will require that you have been on your current full time job for at least 6 months in order to count your full time employment income.  Mortgage lenders will like to see that you are in the same field of employment, however, there are many lenders that will consider career changes so this is something you need not worry about. 

4.  Bad news for 1099 income employees.  If you are a 1099 income employee, you need to provide two consecutive years of tax returns.  The two tax returns income is averaged only if your income for both years are the same, and/or if you most income year 1099 income is greater than your prior year.  If your most recent 1099 income is less than the prior 1099 income, than the lesser of the two year 1099 income will be used for mortgage income qualification purposes.

5.  Overtime income:  Overtime income can be used if you have had consistent overtime income for the past two years at the same job and your overtime is likely to continue for the next three years.  A written verification of employment stating these fact will be required in order for a mortgage loan borrower to be able to use overtime income.

6.  Part time income can be used if and only if the mortgage loan borrower has the same part time job for the past two years and the part time income is likely to continue for the next three years.  A verification of employment will be required confirming these circumstances.

7.  Social security income can be used for mortgage qualification and mortgage approval process.  Social security income can be grossed up by 25% as long as it is not taxable.  For example, if a mortgage loan borrower has $1,000 per month in social security income, they can gross this $1,000 net social security income by 25% which yields $1,250.  The $1,250 income will be used for qualifying this mortgage loan borrower.

8.  Pension income:  Net pension income can be used and can be grossed up by 25% just like social security income.

9.  Child support and alimony income:  Child support and alimony income can be used as long as the mortgage loan borrower can provide written documentation and that the child support and/or alimony income will continue for the next three years. 

Along with your W-2s and/or 1099’s, mortgage lenders will want to see your two years tax returns to see if you had any writeoffs.  If you had many writeoffs, it will be deducted from your income so this can pose a problem when it comes to calculating your debt to income ratios.  If for some reason you do not qualify due to higher debt to income ratios due to a shortage of income, FHA allows mortgage loan borrowers to have non-occupant co-borrowers.  Non-occupant co-borrowers need to be family members or relatives of the mortgage loan borrower.  Non-occupant co-borrowers do not go on title but will be on the mortgage note.

Debt In The Mortgage Qualification Process

A mortgage loan borrower’s debt will be thoroughly analyzed and is a major factor in the mortgage qualification process and can affect the mortgage loan borrower’s qualifying debt to income ratios.  Any monthly minimum debt payment is figured in when qualifying for the mortgage loan 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.  Car payments are often a problem 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

FHA allows deferred student loans that have been deferred for at least 12 months not to count towards your debt in the mortgage qualification process.  This is not the case with conventional loan programs.  With conventional loans, they look at student loans differently.  Even if your student loans are deferred, conventional mortgage lenders will take 2% of your mortgage loan balance and use that towards your student loan minimum monthly payment in calculating your debt to income ratios.  Even though you are not making any monthly student loan payments, they will use it towards monthly debt payment.

Short Term Installment Loans

If you have an automobile loan that has less than 10 months in payments, you 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.  Mortgage 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 your monthly debt payments in calculating your debt to income ratios.  If you are exceeding the required debt to income ratios, paying off your credit cards might reduce your high debt to income ratios.

Co-Signer On Debt

If you are a co-signer on a loan and you are not paying on that loan but the main borrower is, you can offset this monthly payment 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.  If you have co-signed for a family member and/or relative/friend on a car, home, student loan, and you are not responsible for the payment, get the mortgage lender 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 you 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 a mortgage loan 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 any FHA loan mortgage borrower if they have credit scores under 620 FICO.  If the FHA loan borrower has a credit score of over 620 FICO, then the debt to income ratio can go up to 56.9% debt to income ratios.  FHA allows for a mortgage loan borrower to have open collections and prior derogatory credit.  However, late payments in the past 12 months can be a problem and may cause a denial per DU FINDINGS and/or LP FINDINGS.  There are mandatory waiting periods after a bankruptcy and/or foreclosure for FHA loans as well as other mortgage loan programs.  For FHA loans, mandatory waiting period after a bankruptcy is 2 years from the discharge date of the bankruptcy.  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 your credit scores are, the higher mortgage rate you will get quoted with unlike FHA loans.  For FHA loans, everyone with a 640 FICO credit score normally get the same mortgage rate.

Minimum Credit Scores On FHA 203k Loans

Minimum credit score requirements for 203K loans are normally at 640 FICO.  Minimum credit score requirements for HomePath loans are normally at 660 FICO.  Minimum credit score requirements for USDA loans are normally at 620 FICO.  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 90% loan to value, a minimum credit score of 740 FICO is required.

Home Loan With Low Credit Scores

Just because your credit scores are low does not mean that you will not qualify for a particular mortgage loan program.  As long as you have the income and your debt is in line and qualify with debt to income ratios, boosting your credit scores can be an easy fix.  There are quick fixes in improving your credit scores.  Just paying down your credit cards to a 25% balance of your credit limit can improve your credit scores overnight.  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 your credit scores.  Most experienced mortgage loan originators know some quick fixes on improving your credit scores right away.

Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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