Wednesday, July 1, 2009

Getting Closer to a Preapproval!

Ok so we left off last time at the minimum credit score needed to qualify for a loan. Now we are going to look at some other factors taken into consideration in order to qualify.

Your loan officer has already pulled your credit and they are looking at the report not just for your credit score. They also want to see your monthly debt load in order to calculate your debt to income ratio. Now what is a debt to income ratio you might ask? It is a comparison of your monthly liabilities to your monthly gross income.

To calculate your debt to income ratio, add up the monthly payments you pay on everything. When I say everything let me clarify what I mean. I am talking about monthly liabilities that are reported each month on your credit report. These are items such as car payments, minimum payments on credit cards, loan payments, other mortgage payments, home equity line payments, and student loans. Student loans are a little tricky. The last time I checked the guideline if they are in deferrment for two years or more (and you can provide the documentation to show this), then you do not need to include the payment. If the student loan is deferred for less than two years, than it would need to be included in your ratio. Please do not forget above everything else listed to include the proposed mortgage payment, including taxes, insurance, and homeowner's association dues.

Once you have the total of all your monthly liabilities, you are going to divide that dollar amount by your gross monthly income. If there is going to be more than one person on the loan, please add up each person's liabilities together, take that total and divide that by the total gross income of all parties. Now you once you have divided those figures, you (hopefully!) get a decimal figure under .45 or 45%. That is your debt to income ratio! Underwriters on the conservative side do not want to see a DTI over 43%, with good compensating factors you can go up to 45%. Back in the mortgage heyday you could go up to 50%! But those days are pretty much gone.

Now we just calculated your back end debt to income ratio. Underwriters also look at your front end ratio, which is also known as your housing ratio. This is calculated by taking the proposed mortgage payment and dividing that by your gross monthly income. This ratio is not weighted as heavily as your back end ratio, but is still taken into consideration.

Please note I know it is easy to say get your gross monthly income, but I know that most people have different variables that go into their pay including bonuses, commission, tips, and overtime. To be on the conservative side, you can start out with just your base salary. Now if your base salary alone does not get you to a ratio under 45% and you do have overtime and bonus, underwriters will be a little reluctant to use that to help out your ratios as that is not guaranteed income. They calculate any bonus or overtime over a two year average. If you have not been in your current position for two years, bonus or overtime will probably not be calculated for debt to income ratio purposes, but more likely viewed as a compensating factor.

Now I just brushed on the topic of borrowers on a commission structure. If 25% or more of your pay comes from commission, you will be viewed more like a self employed borrower. What this means is that you will need to be employed in your current commissioned position for at least 2 years (once again so underwriters can get an average pay figure), and also be ready to hand over your last two years tax returns.

Self-employed and 1099 borrowers are going to have an even more difficult time. Be ready to hand over EVERY SINGLE page of the last two years tax returns, along with profit and loss statements, and all accompanying schedules of your tax returns. That is just the minimum of what the underwriter can ask of these borrowers, be prepared, because they will probably ask for quite a bit more!!

So we covered some more information and you are getting that much closer to getting preapproved! I am going to take a break and enjoy the holiday weekend by the pool and watch some fireworks, so Happy Fourth everyone!!

Sunday, June 21, 2009

So you want to buy a home?

Ok let me just say I had the hardest time setting this blog up!! But I did it, and I will provide some links that helped me in case you would like to set up your own. Ok now on to the post!

This is a blog about bettering your life. That is something that I constantly strive to do and this blog is going to focus on ways to do that. As I have worked in the mortgage industry for the past two years, I have gained valuable knowledge in the steps needed to obtain a home.

This blog is going to start with information on how to reach the cornerstone of the American dream - homeownership. I am not going to sugar coat this process, it takes a lot of hardwork and goal setting. Especially now that mortgage guidelines are tougher than ever. Being prepared and knowing what to expect is half the battle. So let's begin!

Now I know the ideal way to start the home buying process is to go out househunting and find the home that you fall in love with right? Wrong! Before you even think about doing that you need to get preapproved. Now I know you are thinking what is the difference between a prequalification and a preapproval? A prequalification is when the loan officer takes your income and asset information verbally and pulls your credit. A preapproval is when they collect your income and asset documentation (W2's, paystubs, bank statements, etc.), pull your credit and have an underwriter review the information. Please note that different lenders do have different ways of doing things, and some people will use these terms interchangeably.

Before we go any further, I would strongly recommend getting your credit scores from all three credit bureaus. The minimum credit score needed to qualify for an FHA loan (Federal Housing Administration, we will go into more detail on these loans later) is 620 and with a conventional loan it goes up from there. When you receive your scores, you will receive three. The lender will use the mid score as your qualifying score. If you are going to have another person on the loan, the lender will take the lower of the middle two scores. If you are below the 620 mid score qualifying mark, that is going to stop you at this point in the process (for now).

A good website to learn more about how credit scores are calculated is Variables such such as payment history, amount owed compared to credit limit, how long accounts have been open, and the mix of accounts you have are taken into consideration.

Credit score is just one variable that will be needed for a preapproval, but if you do not have that base covered, there is no need to worry about the other variables that are taken into consideration for a preapproval just yet. Now for those of you that do have at least the minimal qualifying score, we will discuss what else will be taken into consideration on the next post!

**Please note that the advice provided is based on current market guidelines. Guidelines are subject to change at any time and do. For advice on your exact situation, please contact your local loan officer/mortgage broker that you are working with. The opinions/statements provided in this blog are in no way opinions/statements of my employer**