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The mortgage process, especially for those who are denied or delayed, is an enigma to most. Understanding a few basics, three in fact, can help open the windows and let some light on the mysterious inner-workings of mortgage lenders. Getting denied or being quoted a higher rate than you heard advertised need not be a huge question mark.
Every conventional lender, those who lend according to Fannie Mae and Freddie Mac guidelines, builds their lending criteria equal to or more stringent than the guidelines offered by those to mortgage holding giants – unless they are selling to Ginnie Mae or another mega investor. In those guidelines are some very simple first steps so important to the lending process they can be the cause for the vast majority of denials or increase costs of credit.
Whether you are applying for money to purchase a home or to refinance one you currently own these three points are crucial to your success in obtaining a good mortgage.
Number One: Employment and Income
Chances are if you skip around from job to job, especially in different industries, and you have large gaps of time between them you will be considered too high risk at least for a prime loan. Even if you have steady employment history if your income is not verifiable to the amount you need for a good debt ratio you can also be denied or incur the cost of risk in the form of a higher interest rate.
Self-employed borrowers generally need to demonstrate two full years of self-employment as evidenced by a business or professional license or other acceptable documentation. The tax returns of self-employed borrowers are usually required and the adjusted gross income, less any allowable deduction add-backs, are the accepted form of verification of income. So if you “write everything off” you may be shooting yourself in both feet when it comes to qualifying for a bank loan.
Number Two: Payment History and Credit Scores
You have probably seen the adds of mortgage companies saying “bad credit okay”. Hold on to your assets if you go to them and don’t give them an unreasonable application fee because the industry that sets the qualifications disagrees with them. This means if they are able to get you financed you’re going to pay the price one way or another. It is always better to maintain a good payment history and resulting credit scores.
Missing payments and being late on payments are two different things but neither are good. Being late on a payment is being 30 days or more late in paying. In other words if your payment is due on May1 and you make the payment on May 29 you are not considered late for credit reporting purposes. However is you do not make that payment until June 2 then you are late and that counts as one 30 day late or “one times thirty”.
Payments made late, even one times thirty, can wreak havoc on your credit scores and obviously it gives you a bad mark on your payment history. When the loan officer asks if you have been late on any payments in the last 24 months and you say no she is going to find out if you are telling the truth as soon as the credit bureau starts spitting out your last 10 years or so of payment history.
Number Three: Property Type and Purpose
Condos, log cabins and single family detached homes all present varying levels of risk to the bank. Risk is determined by historicity of repayment by similar borrowers on similar properties over the decades. Likewise a single family detached home in which the borrower is going to live is different from a single family detached home on the beach where the borrower may want to live but only spends a few weekends per year.
Commercial properties and residential properties are two completely different items in the eyes of the lender. In fact you cannot use a commercial loan on non-commercial properties and you cannot use a residential loan on non-residential properties. Each carries its own level of risk and therefore qualifications and costs of credit.
Hopefully you know what your credit score is. If not you should. You should also know if your credit report contains any derogatory information such as collections, charge-offs or late payments. If you find real errors on your report you may challenge the reporting bureaus to have the lender provide proof of the reasoning they submitted for derogatory comments.
You know your income and you should know whether or not you can truly afford a home. One of the big pushes on loan officers today is to make certain they believe you are fiscally responsible enough to own a home even if you earn enough income and seem “fun to chat with”.