Insider Tips on Qualifying for a Mortgage
If you are wondering how lenders actually qualify you for a mortgage, here are the nuts and bolts of how it works behind the scenes! Get your mortgage insider tips from Natasha Lovas – San Francisco mortgage broker.
Our underwriters look at your new housing payment (mortgage + taxes + insurance), add your monthly debts (credit cards + student loans + car loans) and divide that into your gross monthly income. The result generally needs to be under 45%, although some of our lenders will allow the ratio to be as high as 50%.
A stable, solid work history or other source of income is vital to your loan application. Your employment history for at least the past two years must be documented with W-2 forms and tax returns, and your current employment documented with two recent pay stubs. If you are self-employed, you will also need to provide a third-party verification of your business or partnership. The following items will need to be explained and/or documented: The following types of employment will be highly scrutinized and may or may not be allowed as qualifying income:
- Self-employment for less than two full tax years
- Owning a start-up
- Contract or temporary employment
- Rental income that shows as a loss on your tax returns
- Self-employment that cannot be verified by a separate phone line or listing on 411.com
- A good rule of thumb is: “If you can’t trace it, you can’t use it”. Thus, income that does not show up on your tax returns cannot be used to qualify.
You need to document the source of your down payment, closing costs and enough cash reserves to make house payments for at least two months.
You’ll need to provide the last two months of your checking, savings, brokerage and retirement fund statements. These statements need to show your name, address and bank account number. Note that, unless you are receiving a gift of at least 20%, all lenders require that at least five percent of the purchase price has been in your accounts for at least the past two months — this is known as “seasoning”.
Lenders want to see that you have the ability to save, or at least hold onto a windfall should you be lucky enough to receive one. Furthermore, lenders want to be sure you have not borrowed the down payment, creating a future undisclosed liability.
In order to sell your loan on the secondary market, the lender needs to be sure you are not laundering money or obtaining your down payment from illegal activities. Any large non-payroll deposits over the past 60 days must be explained and documented, even if you are not using that account for the down payment or closing costs. Generally, lenders want deposits over $1,000 to be explained. Please be sure to make a copy of any large checks before you deposit them.
Again, lenders want to be sure you are not borrowing money without disclosing this as a debt, so gifts must be documented properly. They must be from a family member or domestic partner and must come with no strings attached. I will send you a gift letter format with instructions that you can use to document your gift.
Your credit report will determine your monthly debt load which is used in the ratio calculation mentioned above. Those debts include credit cards, car payments, student loans and mortgages. The credit report also includes three FICO scores – only the middle score is used for qualification purposes.
In general, a score of 720 or higher is most excellent and means you will qualify for the best rates. Scores between 680 and 720 are fine, but your score must exceed 700 for most jumbo loans. You will pay a higher interest rate if your score is below 700. Lenders will also take a closer look if your credit report shows any past bankruptcies, judgments, foreclosures, short sales, liens or collections. Please let me know if you have any of these issues during our first conversation.
Your FICO score is based on the following factors:
- 35%: Payment history. Recent late payments (within the past 12 months) are scored lower than old late payments. A 30-day late payment made just a month ago will count more than a 90-day late payment five years ago. Serious items such as bankruptcy, foreclosures and liens will lower your score considerably.
- 30%: Amounts owed creditors. Total debt is considered as well as whether your account balance is close to your credit limit. Your score will suffer if numerous accounts are charged up near their limits.
- 15%: Length of time credit has been established. Scores consider the age of your oldest account as well as average age of all your accounts. Higher scores for longer history. If you are a recent immigrant, your scores will be lower even if your accounts have been paid on time.
- 10%: Inquiries showing recent application for new credit. How many new accounts, recent inquiries. Adding new accounts could lower score.
- 10%: Mix of credit, whether retail accounts, installment loans, finance company accounts and mortgage loans.
TIP: Many potential home buyers think it’s a great idea to close all their old credit and store cards, thinking this will increase their FICO scores. However, this will have the opposite effect: by closing old accounts that were paid on time, you are also erasing your good credit history and may actually lower your score.
- Correct any mistakes
- If you find a mistake on your credit report, have it corrected as soon as possible. Make sure you have a copy of your credit report that contains information from the three major credit agencies — Consumer Reporting Agencies (“CRA”).
- Figure out which agency is reporting the inaccurate information (there are usually codes next to each item that identify the agency), and file a dispute online.
- Equifax: http://www.equifax.com
- Experian: http://www.experian.com
- TransUnion: http://www.tuc.com
- Your dispute must be investigated within 30 days.
- When the reinvestigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the credit card company verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the credit card company.
- Use Rapid Re-Score: If you need to fix a mistake more quickly, or pay down some high balance cards to raise your scores, we can help with our Rapid Re-Score program. If you qualify for the program, your credit scores can be raised significantly in about a week.
- Try to get legitimate late payments removed: If a creditor is reporting one or two late payments that you would like removed from your report, contact the company directly and ask that the items be removed. This generally works well with retail store cards who don’t want to lose your business. Provide us with a letter from the store and we will take care of the rest.
- Don’t waste your money on credit repair agencies. If you have not successfully removed legitimate late payments, there is not much you can do except wait it out. There are agencies that purport to “repair” your credit but I have not seen this actually work and it’s very expensive. I don’t place much faith in these agencies, despite their promises.