About Home Loans
Qualifying for a mortgageQualifying for a mortgage has become more difficult since the upheaval in the credit markets in 2007. There are still mortgages available, but perspective homeowners need to be ready to provide more documentation than in the past. When buying a home your mortgage lender will look at your income, assets, credit and the property you are buying. Each of these items must be in line with the requirements of the loan program you are planning on using.
IncomeWhen reviewing income, the underwriter will look at the type of income (employed or self-employed), stability of income (length of time on the job and consistency of income). They will also determine if your income is sufficient to afford the new property. Mortgage lenders use debt ratios to determine if you have sufficient income to afford the house.
Debt RatiosTo determine if you can afford the home, lenders compute debt ratios. Most loans require two ratios, the housing only (or Top) ratio and the total debt to income (or Bottom) ratio. To calculate the Top ratio the lender compares the proposed house payment (principal, interest, taxes, insurance and any monthly assessments) to the borrowers gross income. For conventional loans this ratio should be 28% or lower. FHA loans allow a slightly higher Top ratio. The Bottom ratio is computed by dividing total debt by income. Conventional loans want this ratio under 38%, while FHA allows up to 42%. When computing debt ratios we only include monthly payments that are reported on your credit report like auto payment, student loans and credit cards. Items like health insurance and utilities are not included. For self employed borrowers lenders look at income after deductions, we recommend discussing your situation with a qualified mortgage lender to see how much income you can claim.
Work HistoryAll mortgage applicants need to document two years work history. To document income on W-2 wage earners lenders require the most recent two years w-2s and most recent month of pay stubs. For self employed and borrowers who make commissions, bonuses or other types of income lenders will also need to look at your last two years tax returns. For self employed borrowers lenders will generally average the income over the last two years. Lenders also want to see that income is stable or increasing. If income is decreasing it will raise flags and may cause issues in underwriting.
AssetsWhen purchasing a home underwriters need to verify the source of your down payment and any reserves that are required for the loan. Funds must be seasoned in your bank account for 60 days. You need to document any large deposits into your accounts. Lenders want to be sure you did not take out a loan that is not reporting on your credit report. Most loan programs allow gift funds for a part of the down payment. To use gift funds the person giving the gift has to sign a letter stating that the gift does not have to be repaid. The grantor of the gift also needs to source the gift.
The Underwriting ProcessDuring the loan process the loan officer collects information on your income, assets, credit and property. That information is then reviewed to make sure you fit into the lender’s guidelines. The process of reviewing your information and comparing it to lender guidelines is called Underwriting. Most loan programs pre-screen applicants by running the borrowers credit and income information through a computer program. The program is an electronic underwriting engine. If the computer approves the file it is then the job of the lender’s Underwriter to verify that the information put into the computer is accurate. Lately, the underwriting process has become much more strict than in times past. It is not uncommon for lenders to require multiple pieces of information from clients that seem redundant. Furthermore, the information provided for one condition may cause the Underwriter to ask other questions. For these reasons it is a good idea to avoid making too many changes while shopping for a house. Avoid changing employment, buying a new car or taking out loans. Try to avoid making large deposits into your bank accounts, and if you do make deposits keep documentation on the source of the funds. If you pay off any items that are reporting on your credit report, keep that documentation also.
Loan ProgramsThe most common loan programs are Conventional, FHA, VA and Conventional Non Conforming. We have summarized the advantages and disadvantages of each of these programs below.
ConventionalMortgages insured by either Fannie Mae or Freddie Mac are called conventional loans. These are the most common loans for people with good credit and money for a down payment. Conventional loans offer the lowest interest rates and the lowest costs. Conventional loans have a minimum loan size of $50,000 and a maximum of $417,000. Conventional loans require Private Mortgage Insurance (PMI) if you put less than 20% down on your purchase. To avoid paying PMI on conventional loans you can opt for a combo loan. In that case you will do two loans, one at 80% of the purchase price and another for 10% or 15%. Using combo loans you can still get into a conventional loan with as little as 5% down and not have PMI. The only downside to conventional financing is stricter income and asset requirements, and that you must have at least a 3% to 5% down payment.
FHAOriginally started as a First Time Homebuyer program, FHA loans are one of the most common loans in America. FHA loans have less stringent income and asset requirements than conventional loans. Though they still require a 3.5% down payment, FHA allows the entire down payment to come from a gift. FHA loans do not have a stated minimum, but most lenders will not originate a loan for less than $40,000. The maximum FHA loan size is dependent on county; in Dallas county the maximum is $271,050. The maximum loan size increases for multi-family properties. The main downside of FHA financing is that FHA loans have two types of mortgage insurance. When the loan is originated borrowers pay 1.75% in “up-front” mortgage insurance. This amount is generally financed into the loan. Borrowers also pay monthly PMI for the duration of the loan. The monthly amount varies, but is similar to that paid on conventional loans.
VAInsured by the Department of Veterans affairs, VA loans offer low cost financing to members of the Armed Forces and Reserves. Unlike Conventional and FHA loans, VA loans do not require a down payment. And like FHA loans, VA loans have slightly less stringent income and credit requirements. The veteran’s eligibility is determined by the amount of time they served in the military. VA loans have a “funding fee” that is financed into the loan, but they do not have monthly mortgage insurance. The only real downside to a VA loan is the VA funding fee, and the fact that you cannot get a VA loan unless you were (or are) in the military.
Conventional Non-ConformingWhen people borrow more than the conforming limit ($417,000) the loan is known as non-conforming or Jumbo. Jumbo loans have very strict income and asset requirements. Jumbo lenders always require at least a 10% down payment, and the down payment rises as the loan gets larger. Jumbo lenders also generally require the borrower to have substantial liquid assets in the bank after the loan closes. Because they are higher risk, Jumbo loans have higher interest rates than conforming loans. For this reason Jumbo borrowers often choose to do Adjustable Rate Mortgages (ARMs). For very large loans (over 1MM) lenders often require two appraisals. If you are looking at financing a Jumbo property it is a good idea to speak with a qualified mortgage professional. These programs change constantly and you want to get up to date information.
This information was provided by:
Lawrence Picchiotti NMLS # 255910
Larry Picchiotti started his mortgage career in 1998 in Dallas, TX. Larry (LP) started his own mortgage business in 2005 as Lending Team USA and recently launched Lakewood Lending. Lakewood Lending originates all residential mortgages including conventional, FHA, and VA for purchases, refinancing or cash out. Larry’s strengths in the residential mortgage business include a personal touch with each and every loan, availability after hours and weekends, and consistent feedback with honesty, confidentiality, and integrity.