Pre-Qualifying Borrowers With Bad Credit On Purchase And Refinance

Pre-Qualifying Borrowers With Bad Credit For Mortgage Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will be covering pre-qualifying borrowers with bad credit for mortgage loans. This article on pre-qualifying borrowers with bad credit for mortgage loans is a resource mortgage guide for borrowers and loan officers. New loan officers need to understand that the pre-approval process is the most important stage of the mortgage process.

The number one reason for stress during the mortgage process and last-minute mortgage loan approval is due to the loan officer not properly qualifying mortgage borrowers. Issuing a hasty pre-approval is not the wisest thing you can do as a mortgage loan originator. In the following paragraphs, we will discuss and cover pre-qualifying borrowers with bad credit for mortgage loans.

What Is The Main Reason For a Last-Minute Mortgage Loan Denial?

YouTube player

The main reason for last-minute denials or stress in the mortgage process is because the loan officer did not properly pre-qualify borrowers. Loan officers issued a pre-approval letter without properly qualifying borrowers. Training a loan officer cannot be done overnight. Takes a lot of time, patience, and practice. Most borrowers do not have 700 credit scores, perfect credit payment history, have 20% down payment, have a low debt to income ratios, or have steady solid incomes and employment history.

Borrowers Credit Scores And Payment History Profile

Every borrower’s credit and financial profile needs to be carefully and thoroughly reviewed. Make sure they not only meet the minimum federal agency guidelines but also meet the guidelines of your mortgage company. Depending on where loan officers work, they need to know their 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 borrower through a referral, the first step when dealing with borrowers the initial interview. Pre-Qualifying Borrowers is one of the most important steps in the mortgage pre-approval process. Make sure to have a notepad and pen prior to calling the borrower to take detailed notes.

Questions To Ask When Pre-Qualifying Borrowers

Prior to taking a formal mortgage loan application, the first step when pre-qualifying borrowers are to ask a series of questions and take detailed notes. Loan officers 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 in this article is how I personally pre-qualify our clients.

Qualifying Borrowers Prior To Issuing Pre-Approvals

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 an 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 that 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?

Income And Meeting Debt To Income Ratio Requirements

Do the properties that you are looking at have homeowners’ associations. 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. They are all very important. This is 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 receive 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?

What Is a NON-Occupant Co-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?

Why Do I Need a Non-Occupant Co-Borrower?

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.

Employment Gaps and Employment History Guidelines

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 are allowed in the past two year. With gaps in employment the rules are as follows:

  • If a borrower has a 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 the 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 And Other Income Mortgage Guidelines
Overtime And Other Income Mortgage Guidelines

Overtime, part-time, and bonus income can be used if the borrower has at least a two-year prior history. Overtime, part-time, and bonus income needs to have a strong likelihood that income will continue for the next three years is probable. Child support and alimony income can be used as qualified income. This holds true as long as the borrowers can provide the support of income documentation for both child support and alimony, copies of the divorce decree, and birth certificates of the children.

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.

Credit Scores Used To Qualify Borrowers

YouTube player

The lower of all borrowers’ middle credit scores are used for qualification purposes. Now since you have qualified income, loan officers need to find out as much as they can about the borrower’s debts when pre-qualifying borrowers. The 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 the 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 on FHA Loans. 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 0.50% of the outstanding student loan balance will be used as a monthly debt. Conventional loans allow Income-Based Repayment. FHA Loans now allows IBR payments on student loans.

How To Question and Qualify Borrowers

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. How many are medical collections and how many are non-medical collections?

Pre-Qualifying Borrowers With Bad Credit and Public Records

Do you have any judgments or tax liens?

  • Are you renting or living rent-free with family?
  • if you are renting, how are you paying your rent and is the landlord a private landlord or a registered property management company?
  • With cash or check?

Borrowers can have prior bad credit and as long as they have a 580 credit score. Can qualify for a 3.5% down payment FHA Loan with 580 credit score. However, 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, cannot have sporadic late payments in the past 12 months and qualify for a mortgage loan.

Pre-Qualifying Borrowers With Lower Credit Scores

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 credit scores. Paying them down will instantly boost a person’s credit scores.

Mortgage After Bankruptcy and Foreclosure

There is a two year waiting period after a Chapter 7 Bankruptcy discharged date to qualify for an FHA loan. 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 FHA loans. 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.

Pre-Qualifying Borrowers With Collections And Charged-Off Accounts

Can qualify for FHA Loans with outstanding collection accounts and do not have to pay off the outstanding collection account balance to qualify for government and conventional loans. Medical collections do not matter. However, consumers with more than $2,000 of outstanding unpaid collection accounts that are non-medical the following applies. Then 5% of the outstanding balance is used as a borrower’s monthly debt and will be used for debt to income ratio calculations. This holds true unless a written payment agreement has been made with the collection agency and/or creditor.

Mortgage With Judgments and Tax Liens

Judgments and tax liens need to be addressed. Borrowers need to have it paid off at or before closing or the borrower needs a written payment agreement with the judgment creditor and/or IRS. Need to have made three monthly payments and provide three months of canceled checks. Cannot pre-pay the three months in advance.

Mortgage Process With Judgment and Tax Liens

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. This holds true 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 lender.

Next Step After Pre-Qualifying Borrowers Over The Phone

After pre-qualifying borrowers over the phone, loan officers can then direct them to a link to complete an online mortgage loan application, also known as the four-page 1003. Or can take the application over the phone. Make sure to double-check the social security number, date of birth, and the correct spelling of the borrower’s name. Run the tri-merger credit report. If they meet the minimum credit score requirements, then make sure to carefully review the borrower’s overall credit report.

How Do Mortgage Underwriters Look For With Late Payments and Collections

Look for late-payments and credit disputes. Cannot have credit disputes on charge off accounts and non-medical collection accounts with overall outstanding unpaid balances of over $1,000. 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 do not have to be retracted.

Income and Employment Mortgage Guidelines

Loan Officers should then request two years of 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.

Pre-Qualifying Borrowers 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 properly qualified. Just meeting the minimum mortgage lending guidelines is not enough.

Need to check with lender overlays and make sure that the whole file makes sense. Case scenarios on borrowers loan officers 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.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *