Preparing For Mortgage For First Time Home Buyers

This ARTICLE Is About Preparing For Mortgage For First Time Home Buyers

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

How to Prepare for a Mortgage with 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 homebuyers will be paying their mortgage payments
  • Cash payments do not count in the mortgage world

All income and/or assets used in the mortgage process needs to be documented.

Income Documents Required By Mortgage Underwriters

Lenders require the following:

Gaps in employment are allowed:

  • Employment gaps of 6 months or more require borrowers to be on a new job for at least six months
  • Employment gaps of 6 months or less require a 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 of longevity:

  • Two years W-2s and 30 days paycheck stubs

Debt to income ratio requirements depends on the particular loan program

  • HUD, the parent of FHA, allows max 46.9% front end/56.9% back end DTI to get approve/eligible per automated underwriting system (AUS)
  • VA Loans does not have a 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
  • There is no front end debt to income ratio caps on conventional loans
  • NON-QM Loans allow up to 50% DTI with compensating factors

VA and FHA are the only two loan programs that allow manual underwriting. Compensating factors are important for borrowers with higher debt to income ratio on manual underwriting.

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 a 10% down payment
    • Down payment on non-QM loans depends on borrowers credit scores

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

Here are the maximum seller’s 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

Non-QM loans allow seller’s concession. However, the amount of the seller’s concession depends on the wholesale non-QM mortgage lender. Most non-QM lenders allow up to a 6% seller’s concession.

Sources Of Verified Funds For Down Payment And Closing Costs

What are the sources of verified funds for the down payment and closing costs

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

  • Cash cannot be used for a down payment on a home purchase
  • All down payment needs to be verified funds
  • Any larger and/or irregular deposits need 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 are considered verified funds
  • Homebuyers 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 are allowed for the down payment
  • However, the donor needs to sign-gift letter form provided by the lender
  • The gift letter states that gift funds for a down payment is not a loan and is a gift
  • It does not need to be paid back
  • The donor of gift funds needs to provide 30-day bank statements showing that gift funds have been seasoned for 30 days
  • Gift funds leaving donor’s account and being deposited to borrowers accounts need to be provided

Homebuyers 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 a 10% down payment

USDA Loans does not normally have a minimum credit score requirement:

  • However, it is best-recommended borrowers have 580 credit scores to increase their chances of getting an approve/eligible per AUS

VA loans do not have a minimum credit score requirement:

    • However, a 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 the pricing of rates based on credit scores. The lower borrowers’ credit scores, the higher the mortgage rates.

Preparing For Mortgage: Avoid Credit Disputes During The Mortgage Process

Why you should avoid credit disputes during the loan process

Cannot have credit disputes during the mortgage process.

  • Credit disputes during the 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
  • Medical credit disputes are exempt
  • Non-medical credit disputes with zero outstanding balance are exempt from credit dispute removal
  • If the borrower has an outstanding total balance of $1,000 or under from all the sum of credit disputes on non-medical collections, then it is exempt from retraction

If the borrower has credit disputes that are 24 months or older, it is exempt from retraction.

Qualifying And Getting Pre-Approved For Mortgage

Homebuyers should plan well ahead in preparing for a 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 Gustan Cho Associates at 262-716-8151 or text us for a faster response for free sound advice. Or email us at [email protected] Gustan Cho Associates is a mortgage company licensed in multiple states with no overlays on government and conventional loans. We have a national reputation for being a one-stop mortgage shop for having dozens of non-QM and alternative financing loan programs. Over 75% of our borrowers are folks who could not qualify at other lenders due to their overlays. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

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