Loan Officers Pre-Qualifying Borrowers
This article on Pre-Qualifying Borrowers is a guide for new loan officers. New loan officers need to understand that the pre-approval process is the most important stage of the mortgage process. The main reason for last minute mortgage loan denials or stress in the mortgage process is because the loan officer did not properly pre-qualify borrowers and issued a pre-approval letter when the borrower was not pre-approved. Training a loan officer cannot be done overnight and takes a lot of time, patience, and practice. Most borrowers do not have 700 FICO credit scores, perfect credit payment history, have 20% down payment, have low debt to income ratios, and have steady solid incomes and employment history. Every borrower’s credit and financial profile needs to be carefully and thoroughly reviewed and make sure they not only meet the minimum federal mortgage lending guidelines but also meet the lending guidelines of your mortgage company. Depending on where you work, you as a licensed mortgage loan originator need to know your employer’s lender overlays and need to get familiar with them. Whether you get the borrower through your branch, get them from a lead company, or get your borrower through a referral, your first step when dealing with a mortgage borrower is your initial interview. Pre-Qualifying Borrowers is one of the most important steps in the mortgage pre-approval process. Make sure that you have a notepad and pen when you are about to call the borrower so you can take detailed notes.
Questions To Ask When Pre-Qualifying Borrowers
Prior taking a formal mortgage loan application, your first step when pre-qualifying borrowers is to ask a series of questions and take detailed notes. You may want to prepare a questionnaire sheet with an outline of questions to ask or ask your branch or sales manager to see if there are a general form that the office already has. Every loan officer has their own system when it comes to pre-qualifying borrowers and the questionnaire I have listed on this article is how I personally pre-qualify all of my borrowers.
Here are the key questions I ask when pre-qualifying borrowers:
- What type of property are you planning on purchasing? For those buying a condo and can only qualify for a FHA Loan, the condo complex needs to be FHA Approved. For those purchasing a 2 to 4 unit building, you can use 85% of the potential rental income as qualified income in the borrower’s debt to income ratio calculations on FHA Loans. Conventional Loans, you can use 75% of the potential rental income.
- Are you under contract? If not, when are you planning on buying? The reason I ask this question is because many times I get calls by borrowers who are already under contract and got a last minute mortgage denial or are fed up with their current lender due to delays or other reasons.
- What is the price range of the homes that you are planning on buying?
- Do you know the range of the property taxes and how much the homeowners insurance is on the homes that you have been looking at? Does the properties that you are looking at have homeowners insurance and if so, can you give me a rough estimate on how much the HOA dues are> Property Tax information, homeowners insurance, and homeowners association dues if applicable on the subject purchase property are all very important because it is taken into account when calculating the borrower’s debt to income ratios.
- What do you do for a living? Are you a W2 wage earner or self employed? Are you hourly or salaried? If hourly, how much an hour and how many hours do you work per week? Do you received overtime income, bonus income, or other income? If you are receiving child support income, how old are your kids? Child support income needs to continue for the next three years for it to be counted as qualified income. How long have you worked at your current employer? If you are receiving overtime income, bonus income, part-time, or other income, how long have you been receiving the overtime income, bonus income, part time income, or other income? Are you going to be the only borrower? In the event if you exceed the maximum debt to income ratios allowed, do you have a family member that be a non-occupant co-borrower? What does the co-borrower do for a living? What relationship is the co-borrower to you? Does the co-borrower own a house? Do you know how much the house is worth and what is owed? We will try to qualify you on your own but if your debt to income ratios are over the maximum allowed, we may need a non-occupant co-borrower so if you can talk to the family member and/or members, it will be greatly appreciated. These are very important questions and you as a loan officer need to be extremely detailed on the answers your borrower replies. Make sure you ask the questions that you are not clear of over and over again until both you and the borrower are on the same page. Remember that all mortgage lenders will need a two year employment history. Lenders like to see solid income history and a strong likelihood of continuation of income for the next three years. Gaps in employment is allowed in the past two years. With gaps in employment the rules are as follows: 1. If borrower has gap of employment of under six months, then there is no seasoning requirement with the new job. They do need 30 days of paycheck stubs in order to be able to close on their home loan if they have changed jobs. If gap of employment is greater than six months, then the borrower needs to be employed for at least six months on their new job to qualify. Overtime income, part-time income, and bonus income ,can be used if the borrower has at least a two year prior history of earning the overtime, part-time, and bonus income and there is a strong likelihood that those income will continue for the next three years is probable. Child support and alimony income can be used as qualified income as long as the borrowers can provide the support of income documentation for both child support and alimony, copies of divorce decree, and birth certificates of the children that they are receiving child support from. Child support income needs to continue for the next three years in order to count as qualified income. If the borrower or borrowers seem like they have high debt to income ratios, plant the seed of possibly needing non-occupant co-borrower/borrowers. Non-occupant co-borrowers on FHA Loans need to be related to the borrower by law, marriage, or blood. The lower of all borrowers middle credit scores are used for qualification purposes.
- Now since you have qualified income, you need to find out as much as you can about the borrower’s debts when pre-qualifying borrowers. First question you need to ask is if they have any car payments and how much. Any student loans. List of all other minimum monthly payments. Two biggest deal killers with borrower who have high debt to income ratios are car payments and student loans. An average car payment is $300 per month which is equivalent to a $60,000 mortgage loan balance. Deferred student loans are no longer exempt. Borrowers need to get a payment statement by the student loan provider of what the monthly payment will be if the student loan has been out of deferment or 1% of the outstanding student loan balance will be used as a monthly debt.
- Loan Officers should ask the following questions when pre-qualifying borrowers: How is your credit? Do you have any credit cards or revolving credit accounts? Can we go over each one of your credit card limits and balances? Have you filed bankruptcy and if so when was the discharged date? Have you had a prior foreclosure, deed in lieu of foreclosure, or short sale? And if so, when was the recorded date of the foreclosure and/or deed in lieu of foreclosure or the date of the sheriff’s sale? If you had a prior short sale, when was the date of the short sale? Have you been timely on all of our payments in the past 12 months? Do you have any outstanding collection accounts? If so, tell me about the outstanding collection accounts and how many are medical collections and how many are non-medical collections? Do you have any judgments or tax liens? Are you renting or living renting free with family and if you are renting, how are you paying your rent and is your landlord a private landlord or a registered property management company? With cash or check? You can have prior bad credit and as long as you have a 580 FICO credit score, you can qualify for a 3.5% down payment FHA home purchase loan. However, you cannot have late payments in the past 12 months. One or two late payments in the past 12 months may be acceptable with a good letter of explanation, however, you cannot have sporadic late payments in the past 12 months and qualify for a mortgage loan. For those who say they have lower credit scores, try to find out why. Asking for their credit card information is a great way of finding out the reason why they may have lower credit scores. If you have maxed out credit cards, that will definitely lower your credit scores. Paying them down will instantly boost a person’s credit scores. There is a two year waiting period after a Chapter 7 Bankruptcy discharged date to qualify for a FHA Loan and a four year waiting period to qualify for a Conventional Loan. There is a three year waiting period after a deed in lieu of foreclosure and/or foreclosure and short sale to qualify for a FHA Loan. There is a four year waiting period to qualify for a Conventional Loan after a deed in lieu of foreclosure and/or short sale. There is a seven year waiting period to qualify for a Conventional Loan after the recorded date or date of the sheriff’s sale of a foreclosure. You can qualify for FHA Loans with outstanding collection accounts and do not have to pay off the outstanding collection account balance to qualify for a FHA Loan. Medical collections do not matter, however, if you have more than $2,000 of outstanding unpaid collection accounts that are non-medical, then 5% of the outstanding balance is used as a borrower’s monthly debt and will be used for debt to income ratio calculations unless a written payment agreement has been made with the collection agency and/or creditor. Judgments and tax liens needs to be addressed where the borrower needs to have it paid off at or before closing or the borrower needs a written payment agreement with the judgment creditor and/or IRS and need to have made three monthly payments and provide three months of canceled checks. You cannot pre-pay the three months in advance. There is a three month seasoning requirement. Borrowers with credit scores under 620 FICO, the Automated Underwriting System may require Verification Of Rent. Verification of Rent is only valid if the borrower can provide 12 months canceled checks and/or bank statements unless the borrower is renting it from a property management company where the property manager can just sign and date a VOR form provided by the mortgage lender.
Next Step After Pre-Qualifying Borrowers Over The Phone
After pre-qualifying borrowers over the phone, you can then direct them to a link to complete an online mortgage loan application, also known as the four page 1003, or you can take the application over the phone. Make sure that you double check the social security number, date of birth, and the correct spelling of the borrower’s name. You then run the tri-merger credit report. If they meet the minimum credit score requirements, then make sure that you carefully review the borrower’s overall credit report and look for late payments and credit disputes. You cannot have credit disputes on charge off accounts and non-medical collection accounts with overall outstanding unpaid balances of over $1,000. You can have credit disputes on medical collection accounts with outstanding collection balances as well as non-medical accounts with zero balances. As long as the total outstanding unpaid non-medical collection account balance is under $1,000, credit disputes are exempt and does not have to be retracted.
You should then request two years tax returns, two years W2s, and 30 days of most recent paycheck stubs. Review the tax returns, W2s, and 30 days paycheck stubs. Running the file through the Automated Underwriting System is always a great idea prior to issuing the borrower a pre-approval letter.
Issuing The Pre-Approval Letter
Loan officers need to realize the importance of issuing a solid pre-approval letter. The number one reason for getting a last minute mortgage loan denial is due to the borrower being pre-approved when they were not pre-approved. Just meeting the minimum mortgage lending guidelines is not enough. You need to check with your lender overlays and make sure that the whole file makes sense. Case scenarios that you may have questions on need to be presented before an underwriter or an underwriting manager. The loan officer needs to be sure that the mortgage applicant is fully qualified before issuing a pre-approval letter.