Applying for a mortgage application has become much easier than a few years ago and so have the mortgage lending guidelines. Home buyers with prior bad credit, prior bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale can now qualify for a residential mortgage loan. Many home buyers do not realize that they can actually qualify for a FHA loan with only a 3.5% down payment requirement with a 580 FICO credit score. Mortgage lenders do require income and want to see that the mortgage loan applicant has the ability to repay the mortgage loan. They like to see job stability and see the likelihood that their employment will continue for the next three years. For first time home buyers, applying for a mortgage may seem like an endless task with the mortgage lender asking them for dozens of questions as well as documentation. Be prepared to be asked many questions, provide documents as well as letters of explanations prior and during the mortgage application process.
Mortgage Application Process
Whether you are dealing with a local bank, credit union, mortgage banker, or mortgage broker, they all will be asking you the same questions and their main objective they have is whether the mortgage loan applicant has the ability to repay the mortgage loan and afford the mortgage payments as well as their other monthly expenses. All mortgage lenders will need to see documented income, liabilities, and assets. Two years tax returns and two years W-2s as well as 60 days bank statements is mandatory. Any irregular deposits needs to be sourced. If a mortgage loan applicant has had a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, all documentation pertaining to these need to be provided. Divorce decrees, child support payments, alimony payment all need to be provided as well as all pages of the payment agreements. Rental verification may be required and if the mortgage lender requests rental verification, the only way it can be proven is by providing 12 months cancelled checks that has been paid to the landlord. If the mortgage loan applicant has been paying his or her landlord cash, rental verification cannot be used unless they are leasing their home from a registered property management company.
Questions Your Mortgage Lender Will Ask
Mortgage lenders are required to ask you for two years employment history and residential history. Mortgage lenders want to know whether you are either renting or living with family. Rental verification is a huge compensating factor due to payment shock. If you can provide rental verification that you are currently paying $1,000 per month in rent and your new proposed housing payment on your new home will be $1,100, you do not have payment shock because your new proposed mortgage payment is only 10% higher than your current rent payment. However, if you are living rent free with a family member and your new proposed housing payment is $1,100, than you have payment shock because you are going from zero to $1,100 per month.
You do not have to have been employed for two years straight. You can have gaps in employment but mortgage lenders require that you provide a two year employment history. College and trade schools can count towards work history as long as you can provide transcripts.
Credit, Credit History, Credit Scores, Derogatories
Your overall credit history will be reviewed and each derogatory account will be scrutinized. It is alright to have prior bad credit and still get a mortgage loan approval. Everyone has had a period of bad credit throughout their lives due to unemployment, business loss, divorce, or other extenuating circumstances. Isolated incidents of periods of bad credit is understandable and so is bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale. However, mortgage lenders like to see that the mortgage loan applicant has re-established credit after a period of bad credit. Almost all mortgage lenders like to see that the mortgage loan applicant has been paying their bills timely for the past 12 months. Recent multiple late payments can be a problem. Also, if the mortgage loan applicant has always had a history of bad credit, that can pose a problem as well because it shows that the mortgage loan applicant has total disregard for credit. Credit scores are extremely important because it dictates whether or not a particular mortgage loan applicant qualifies for a particular mortgage loan program. Credit scores always dictates what mortgage rates the mortgage loan applicant will get.
Debt To Income Ratio
Debt to income ratio is one of the most important factors in the mortgage application process. Conventional mortgage loan programs have a cap of 45% debt to income ratios to qualify for a conventional mortgage loan. There are no front end debt to income ratio requirements on conventional loans. Front end debt to income ratios are the housing ratio. FHA has a cap of 46.9% front end debt to income ratio and 56.9% back end debt to income ratio.
Assets And Reserves
Mortgage lenders will require 60 days bank statements. Any irregular deposits needs to be sourced. The mortgage loan underwriter will want to see that the mortgage loan applicant has enough funds for the downpayment and closing costs. In the event if there are not enough funds for closing, then gift funds may be accepted from a family member. Mortgage lenders do not like to see any bank overdrafts in the past 12 months. Bank overdrafts are one of the most negative things you can have and some mortgage lenders will deny a mortgage loan application even with one bank overdraft in the past 12 months.