Preparing For Mortgage For First Time Home Buyers

Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322
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This BLOG On Preparing For Mortgage For First Time Home Buyers Was PUBLISHED On December 20th, 2019

Buying the first home is a very exciting time for first time home buyers.

Homebuyers need to do three important things in Preparing For Mortgage:

  • Make sure they have qualified income
  • Have verified assets
  • Meet minimum credit requirements

In this article, we will cover and discuss how to prepare and qualify for a mortgage for first-time homebuyers.

Preparing For Mortgage By Having Qualified Income

All lenders require documented income.

  • Days of no doc home loans and/or stated income mortgages are long gone and do not plan on it coming back
  • Qualified verified income is important because lenders want to know how home buyers will be paying their mortgage payments
  • Cash payments does not count in the mortgage world

Income Documents Required By Mortgage Underwriters

Lenders require the following:

  • 2 year employment history
  • Gaps of employment are allowed:
    • Employment gaps of 6 months or more requires borrowers to be on new job for at least six months
    • Employment gaps of 6 months or less requires job offer letter and 30 days of paycheck stubs prior to closing on their home loan
  • 1099 and/or self employment income wage earners require two years longevity
  • Two years W-2s and 30 days paycheck stubs
  • Debt to income ratio requirements depends on the particular loan program
    • HUD, parent of FHA, allows max 46.9% front end/56.9% back end DTI to get approve/eligible per automated underwriting system
    • VA Loans does not have maximum debt to income ratio requirements but does require automated underwriting system approval
    • USDA Loans allow 29% front end DTI and 41% back end DTI
    • Fannie Mae and Freddie Mac require up to 50% DTI on conventional loans
    • NON-QM Loans allow up to 50% DTI with compensating factors

Preparing For Mortgage With Verified Assets

With the exception of VA and USDA Loans, all loan programs require down payments.

There are down payment and closing cost requirements on home purchase transactions.

  • VA and USDA Loans allows 100% financing so no down payment is required
  • FHA requires 3.5% down payment
  • Fannie Mae and Freddie Mac require 3% to 5% down payment on conventional loans
  • NON-QM Loans require 10% down payment
    • Down payment on non-qm loans depends on borrowers credit scores

Most borrowers just have to come up with down payment. Closing costs is normally covered with sellers concessions by sellers and/or lender credit.

Here is the maximum sellers concessions allowed per loan programs:

  • HUD allows 6% sellers concessions on FHA Loans
  • VA permits up to 4%
  • USDA Loans allow up to 6%
  • Conventional Loans are 3% for primary homes
    • 2% sellers concessions on investment properties

Sources Of Verified Funds For Down Payment And Closing Costs

Cash and/or non-verified assets cannot be used in mortgage transactions:

  • Cash cannot be used for down payment on home purchase
  • All down payment needs to be verified funds
  • Any larger and/or irregular deposits needs to sourced and verified
  • For example, if borrowers have a $5,000 deposit in their bank account from the sale of a car, lenders need to see canceled checks and bill of sale
  • Direct deposits from payroll is considered verified funds
  • Home buyers with mattress money need to plan ahead and make sure they make that cash deposit as soon as possible
  • Deposit it to their bank account
  • Let is season for 60 days or more
  • Lenders only require 60 days bank statements
  • Any deposit longer than 60 days does not matter
  • Borrowing from 401k accounts is considered verified funds
  • Gift funds from family is allowed for down payment
  • However, donor needs to sign gift letter form provided by lender
  • Gift letter states that gift funds for down payment is not a loan and is a gift
  • It does not need to be paid back
  • Donor of gift funds needs to provide 30 day bank statements showing that gift funds has been seasoned for 30 days
  • Gift funds leaving donor’s account and being deposited to borrowers accounts need to be provided

Preparing For Mortgage With Meeting Credit Guidelines

Home buyers need to meet minimum credit score requirements.

Minimum Credit Score Requirements To Qualify For Mortgage

Here are the minimum credit score requirements for loan programs:

  • FHA Loans require 580 credit scores for 3.5% down payment home purchase loans
    • Under 580 credit score borrowers need 10% down payment
  • USDA Loans require 580 credit scores
  • VA loans do not have a minimum credit score requirement
    • However, 580 credit score is highly recommended if borrowers want to get an approve/eligible per automated underwriting system
  • Fannie Mae and Freddie Mac require 620 credit scores on conventional loans

Credit Scores also is very important when it comes to mortgage rates. Lenders will base pricing of rates based on credit scores. The lower borrowers credit scores, the higher the mortgage rates.

Avoid Credit Disputes During Mortgage Process

Cannot have credit disputes during mortgage process.

  • Credit disputes during mortgage process will halt the mortgage underwriting process
  • Mortgage Underwriters will have borrowers retract credit disputes before the mortgage process can proceed
  • However, retracting credit disputes can plummet credit scores where borrowers can no longer qualify for a mortgage

Qualifying And Getting Pre-Approved For Mortgage

Home buyers should plan well ahead in preparing for mortgage and not wait until the last minute. Make sure not to have any bank overdrafts, credit disputes, and/or credit inquiries months before applying for a mortgage. Contact us at The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or text us for faster response for free sound advice. Or email us at gcho@loancabin.com. Gustan Cho Associates at Loan Cabin Inc. are direct lenders with no overlays on government and conventional loans. Over 75% of our borrowers are folks who could not qualify at other lenders due to their overlays.

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