Mortgage Guidelines 101 For Borrowers & Loan Officers

This Article On Mortgage Guidelines 101 For Borrowers & New Loan Officers Is Written By Gustan Cho In Dedication To Our New Loan Officers

The mortgage business can be tricky and overwhelming not just for borrowers but also to new loan officers. I have written this BLOG on Mortgage Guidelines 101 for not just for borrowers but also for loan officers in a simplified format on key points so they can comprehend. Over 75% of my borrowers at The Gustan Cho Team at CrossCountry Mortgage are folks who either gotten a last minute mortgage loan denial or are going through a stressful mortgage process. This is for one reason and one reason only. The borrower was not properly qualified by their loan officer and the loan officer did not know two important things:

  • The loan officer did not know the guidelines before issuing a pre-approval.
  • The loan officer did not know their own company’s lender overlays before issuing the pre-approval letter.

There is no reason why a pre-approved borrower cannot close on their home loan and close it on time. We at The Gustan Cho Team at CrossCountry Mortgage close our borrower’s loans in 21 days or less and have no overlays. We have a track record of closing 100% of our pre-approvals and closing them on time.

I would also like to congratulate the new members to Gustan Cho Associates at CrossCountry Mortgage in passing the rigorous NMLS Examination and becoming a member of our growing successful mortgage team and those loan officers who are planning on joining The Gustan Cho Team at CrossCountry Mortgage.

Becoming A Loan Officer

Becoming a licensed mortgage loan originator does take time.

  • The first thing you need to do is go to NMLS Resource Center  and register and obtain your NMLS Unique Identifier Number.
  • That number will be your permanent number and you will use it throughout your career as a licensed mortgage loan originator.
  • The next step is to take the 20 hour pre-licensing NMLS approved course and pass the course.
  • You can choose any school of your choice as long as it is NMLS approved.
  • The next step is to take and pass the rigorous 125 question, 3 hour national NMLS exam.
  • You will need a score of 75% in order for you to pass the NMLS Test.
  • The exam is not easy and the best way to prepare for the exam is to take as many practice test as possible.
  • You should go over 3,000 plus test questions before taking the NMLS Exam.
  • If you fail the NMLS exam the first time around, you have two more chances to take them.
  • You need to wait 30 days before you can retake the test.
  • If you fail the NMLS exam three times in a row, you need to wait six months to be able to retake the NMLS exam.
  • Once you have passed the NMLS Exam, you will have to apply for the individual state licenses to be able to originate loans in that particular state.
  • You will need to go through a federal criminal background check by the FBI as well as the state police background criminal background check for every state you apply for.
  • There will be a credit check required as well.
  • You will need a sponsoring company that needs to sponsor you.
  • Once you have completed the above steps, you are now officially a licensed mortgage loan originator and can start training with us.
  • Mortgage 101 For New Loan Officers was written by Gustan Cho to welcome newer loan officers who just passed their exams and background checks and are now employed and ready to do business and originate mortgage loans. 

Information On The NMLS Exam Versus Reality

I have trained many mortgage loan originators, both new to the business and experienced loan officers on not just originating loans but also to take their business and career to the next level. I also advice and mentor many new loan officers, especially those who are preparing for their NMLS exam.

  • I advice test takers only to worry about what is on the test study materials and not worry about whether it is true in real life.
  • Theory versus reality? Many information that is on the test materials is not true in reality.
  • For example, on the NMLS exam, the required debt to income ratio requirements for FHA Loans is 28% front end debt to income ratio and 36% back end debt to income ratio.
  • This is totally wrong.
  • In reality, the actual front debt to income ratio on FHA Loans is 46.9% DTI and the back end debt to income ratio is 56.9% DTI for borrowers with credit scores of 620 FICO or higher.
  • For FHA borrowers with credit scores of under 620 FICO, the maximum debt to income ratio permitted to get an approve eligible is 43% DTI.

On this blog on Mortgage Guidelines 101 For New Loan Officers, I will cover the basics in qualifying a mortgage loan applicant.

Minimum Credit Scores Required Versus Credit Payment History

CrossCountry Mortgage NMLS 3029 is a fabulous company where we are a five star national company licensed in 50 days with a rock solid reputation of no overlays and closing loans in 21 days.

Here is what The Gustan Cho Team at CrossCountry Mortgage has to offer and why you would want to join our growing team:

  • CrossCountry Mortgage has no overlays.
  • CrossCountry Mortgage just goes off the automated findings per Automated Underwriting System and with no lender overlays so I will be covering our mortgage lending guidelines on this article on Mortgage 101 For New Loan Officers.
  • Minimum Credit Scores required on a 3.5% down payment home purchase FHA Loan is 580 FICO.
  • We have no overlays on VA Loans and all that is required is a 580 FICO on VA Loans.
  • There is no debt to income ratio requirement nor cap on VA Loans. Just go off findings.

Credit Score Requirements Of Borrowers

CrossCountry Mortgage has no overlays on credit scores and will accept the following:

  • Every consumer normally has three credit scores.
  • The credit scores that we use to qualify a borrower is the middle of the three credit scores.
  • For example, if a borrower has a 500 FICO credit score with Experian, 600 FICO credit score with TransUnion, and 700 FICO credit score with Experian, we will use the 600 FICO credit score of TransUnion because that is the middle credit score.
  • One of the most important things that loan officers should note is that just because your borrower meets the minimum credit scores does not automatically qualify them for a FHA Loan.
  • You need to thoroughly review the borrower’s credit report and look at the overall credit history.
  • It is not a deal killer for a borrower to have prior bad credit, open collections, judgments, tax liens, charge offs, or other derogatory credit information on their credit report and you do not have to pay off outstanding collections or charge offs to qualify for a FHA or VA Loan with CrossCountry Mortgage because of its no overlay policy.
  • Consumers can go through periods of bad credit due to loss of job, loss of business, divorce, sickness, or other extenuating circumstances.
  • However, mortgage lenders want to see that the borrower has re-established credit and has been timely with all of their payments in the past 12 months and re-established credit after periods of bad credit.
  • One late payment in the past 12 months is not a deal killer, however, if the borrower has multiple late payments in the past 12 months, they may need to wait until they have been timely in the past 12 months before you can proceed with their mortgage process.

Credit Scores Versus Debt To Income Ratio

With FHA Loans, there is a correlation between credit scores and debt to income ratios. As mentioned earlier, if your borrower has at least a 620 FICO credit score, the maximum back end debt to income ratio allowed is 56.9% with FHA Loans. DTI and the maximum front end debt to income ratio allowed is 46.9% DTI. If your borrowers credit scores are under 620 FICO, then the maximum debt to income ratio allowed is 43% DTI with FHA Loans. The above ratios are what is needed to get an approve/eligible per Automated Underwriting System. There are no debt to income ratio requirements with VA Loans and CrossCountry Mortgage will just go off findings. CrossCountry Mortgage does have a 580 FICO minimum requirement on VA Loans.

Verification Of Rent

Verification Of Rent is one of the most important compensating factor a borrower can have because it determines payment shock. In most cases where a borrower has credit scores under 620 FICO credit scores, the AUS, Automated Underwriting System, may request verification of rent.

  • Verification of Rent is only valid if the renter can provide 12 months canceled checks that has been paid timely to his or her landlord or 12 months bank statements showing that the exact rent amount has been transferred to the landlord’s bank account.
  • If the renter has been renting the property from a registered property management company, then a verification of rent form completed and signed by the property manager can be used in lieu of canceled checks and/or bank statements.
  • The VOR form will be provided by the lender.
  • All FHA manual underwriting files will require verification of rent and those who cannot provide VOR cannot get an approval on a manual underwrite.

FHA Loan After Bankruptcy And Foreclosure

Borrowers can qualify for a FHA Loan after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale, however, there are mandatory waiting period after bankruptcy and foreclosure to qualify for a FHA Loan as well as other mortgage loan programs.

  • There is a two year mandatory waiting period of 2 years after a Chapter 7 Bankruptcy discharged date to qualify for a FHA Loan.
  • A FHA borrower can qualify for a FHA Loan if they are one year into a Chapter 13 Bankruptcy repayment plan as long as they have been timely with all of their payments for the past 12 months and get the Chapter 13 Bankruptcy Trustee’s approval.
  • However, it needs to be a manual underwrite.
  • A FHA borrower can qualify for a FHA Loan with no waiting period after a Chapter 13 Bankruptcy discharged date but if the Chapter 13 Bankruptcy discharge has been seasoned for less than 2 years, then it needs to be a manual underwrite.
  • There is a three year mandatory waiting period to qualify for a FHA Loan after the recorded date of a foreclosure or deed in lieu of foreclosure.
  • The three year waiting period starts from the actual recorded date where the borrower’s name has been transferred out of the deed and/or date of the sheriff’s sale and not the date where the homeowner has surrendered the property to the lender.
  • There is a three year waiting period to qualify for a FHA Loan after the date of a short sale.

Late Payments After Bankruptcy And Foreclosure

Mortgage 101 For New Loan Officers: Mortgage lenders do not want to see any late payments after a bankruptcy or foreclosure.

  • Any late payments after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale is considered extremely bad and these folks are considered repeat offenders under a lender’s point of view and most lenders will automatically disqualify anyone with late payments after bankruptcy and/or foreclosure.
  • One or two late payments after a bankruptcy or foreclosure may not be a deal killer but consistent late payments will be considered a total disregard for credit and the chances are that these borrowers will have a hard time qualifying for any mortgage loan program.
  • A credit repair regiment will be required. Contact me if you have borrowers with late payments after bankruptcy and/or foreclosure and I will direct you to the proper person to help these borrowers so they can qualify for a mortgage.

Collection Accounts And Charge Off Accounts

Mortgage Guidelines 101 For New Loan Officers: FHA does not require borrowers to pay off outstanding collection accounts and charge off accounts to qualify for FHA Loans. Many banks and mortgage companies have lender overlays that require all charge off accounts and outstanding collection accounts to be paid off. Our company at CrossCountry Mortgage does not require collection accounts and/or charge off accounts to be paid off as per 2016 FHA Guidelines On Collection Accounts And Charge Off Accounts .

However, loan officers should note that FHA does categorizes collection accounts into three categories and outstanding collection accounts will impact debt to income ratio calculations on non-medical collection accounts.

  • Non-Medical Collection Accounts
  • Medical Collection Accounts
  • Charge Off Accounts

Can You Qualify For FHA Loan With Outstanding Collections & Charge Offs?

FHA borrowers can qualify for FHA Loans with outstanding non-medical collection accounts. CrossCountry Mortgage does not have any overlays with regards to Outstanding Unpaid Collections and Charge Offs.

Here are the rules and guidelines with CrossCountry Mortgage with regards to unpaid outstanding collections and charge offs:

  • If the sum of all of the non-medical collection account unpaid balance exceeds $2,000, then FHA requires that 5% of the unpaid outstanding non-medical collection account balance be taken into account and used as a monthly expense of the borrower and used in the debt to income ratio calculations even though the borrower does not have to pay for it.
  • For example, let’s say that a borrower has $10,000 in unpaid outstanding collection accounts.
  • The borrower is not required to pay any of it off, however, FHA will require the underwriter to take 5% of the unpaid outstanding $10,000 in collection account balance or $500 and use that as a monthly expense of the borrower and be used in the calculations of the debt to income ratio of the borrower.
  • If the outstanding non-medical collection account balance is a large balance, FHA WILL allow the borrower to enter into a written payment agreement with the creditor and/or collection agency and use the agreed upon figure in lieu of the 5% of the outstanding collection account balance.
  • So on the above example, if the $500 monthly payment is too much and will disqualify the borrower because it exceeds the debt to income ratio allowed, the borrower can enter into a $100 per month written payment agreement with the creditor and the $100 per month will be used in lieu of the $500.

The above rule does not apply to charge off accounts and medical collection accounts. Medical collections and charge off accounts are exempt from debt to income ratio calculations no matter how much the outstanding unpaid collection account balance is.

Mortgage Guidelines 101: Credit Disputes

Mortgage Guidelines 101 On Credit Disputes:

  • Many consumers go through credit repair and the most common of doing credit repair is by disputing derogatory credit items.
  • Whenever you do a credit dispute with the credit bureaus, the credit bureaus will not that the disputed item is in dispute and this can create a halt in the mortgage process.
  • You cannot have any credit disputes on any non-medical collection accounts with balances that is greater than $1,000 ( the sum of all of your non-medical collection accounts ).
  • You need to retract those credit disputes and the credit report needs to reflect that those items are no longer in dispute.
  • You can have credit disputes on non-medical derogatory credit items that have zero balances and if the total sum of collection account balances from your credit report is less than $1,000.
  • You cannot have any credit disputes on charge off accounts, no matter how small or large the balance is.
  • You are ALLOWED to have credit disputes on medical collections no matter how much the collection account balance is.
  • Another issue is that when a borrower retracts a credit dispute, the borrower’s credit scores normally drops.
  • Loan officers should not issue a pre-approval letter if the borrower has credit disputes until the credit disputes are retracted.

Mortgage Guidelines 101 On Gaps In Employment

Mortgage 101 For New Loan Officers with Gaps In Employment:

  • With our company, you do not need a two year straight same employment history to qualify for a FHA Loan.
  • As long as you have an overall two year employment history, you are fine.
  • You can have gaps in employment in the past two years.
  • If you had an employment gap of six or more months and just have a new full time job, then you need to stay at your new full time job for at least six month in order for you to qualify for a FHA Loan.
  • If you had gaps of employment for less than six months, than you will qualify for a FHA Loan right away with a verification of employment but cannot close on your home loan unless you have provided the mortgage underwriter at least 30 days of paycheck stubs.

Mortgage Guidelines 101 On Income Qualification

Mortgage Guidelines 101 On Qualified Income:  Income Qualification.

  • Income qualification is the most important factor when it comes to pre-qualifying and pre-approving a FHA borrower.
  • Borrowers with part time income, bonus income, overtime income, you can use this as qualified income as long as the borrower has had two year history and the likelihood to continue for the next three years is very likely.
  • If you have two full time jobs, you can only use both full time job incomes if and only if you have been employed at both full time jobs for two years.
  • If you have less than two year employment history on one of the full time jobs, then only one full time job can be used as qualified income.
  • If you are self employed and/or 1099 wage earner borrower, then two year tax returns is required and two year of self employment history.
  • If you go from a W2 wage earner to a 1099 wage earner, then two year 1099 wage earner employment history is required.
  • If you go from 1099 wage earner status to W2 wage earner status, then you can qualify for a FHA Loan right away with a verification of employment and an employment offer letter but cannot close on your FHA Loan until 30 days of paycheck stubs has been provided.

I will continue on with future blogs for newer loan officers. Please feel free to comment and send me your feed back and do not forget to sign up and become a member on Lending Network Mortgage & Real Estate Information Resource Center Online Community Forum  www.lendingnetwork.org .

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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