Several times now I've written as to how potential borrowers have thwarted their own ability to obtain a mortgage loan for either the purchase or refinance of a home. I thought I'd take the opportunity this time around to summarize some of these mistakes.
Assets - When applying for a loan, particularly one for a home purchase, it's of utmost importance that a borrower can paper trail where the funds are coming from that will be used to close the transaction.
The lender will want to meticulously determine that these funds are not borrowed, at least not without some collateral, and that the borrowers can demonstrate that the funds are rightfully theirs to use.
I bring this up first because to many borrowers, this seems like the most oppressive of all requirements a lender imposes.
This has become critical post-mortgage meltdown (since about 2007) because much of that meltdown was attributed to buyers not having enough of their own skin the game.
It's a good idea, therefore, the keep the bank accounts you intend to use to fund your transaction fairly stable at least two months before going into escrow.
Try to limit cash deposits into your accounts, because more than likely, the lender will want you to document all deposits that are not clearly from your payroll. I've had many borrowers that have described a stray $200 or $300 deposit as the return of funds lent to a friend. Can you prove that the funds came from the friend's
account, or that you lent this friend money in the first place, by presenting a copy of the original note? For most people this is would be a challenge, because let's face it, most people, when lending a friend or a family member some short-term funds, do not require that the recipient sign any type of note or other written agreement. And yet your lender may very well ask you to cough it up.
I've also had borrowers decide to move funds around just as they're going into escrow, possibly by transferring checking funds into savings or vice-versa. Sometimes they do this in order to consolidate their accounts and preclude the need for having to show so many bank statements to the lender. Well guess what? You're going to have to come up with the statements anyway because it's going to be necessary to show where the funds were withdrawn from one account before they were put into another.
So if you can just leave your accounts fairly untouched and give your loan officer all your statements to verify all monies to be used, that is usually the best way to go.
A gift from a family member is usually OK, but it needs to be paper trailed with a gift letter, signed by the donor and the borrowers, along with a copy of the most recent bank statement from the donor. This proves that the donor actually has the funds to give. And the poor unsuspecting generous donors will also have their accounts scrutinized for non-descript deposits. (Hardly seems fair, does it? The donors are trying to help someone buy a house, and they're required to go through many of the same hoops the borrowers are put through.)
On a conventional loan, borrowers are not even eligible to accept a gift from anyone unless they themselves can document that they have funds equaling the first 5 percent of the sales price of the house in their own bank accounts prior to receiving the gift. (This restriction does not apply to FHA or VA.)
When paper trailing a gift, the transfer of the funds from donor to recipient is also required.
The reason I said earlier that your bank accounts should show some stability for two months is that that is the amount of time the lender will look back into your liquid assets. Did you just win $40 million as a Lotto prize? Then just wait three months before buying a home (that is, if you're not paying cash in the first place) and no unseemly questions will be asked by the lender.
Credit - It's difficult, if not downright impossible, to get a mortgage these days, if you have absolutely no credit history.
Some lenders, particularly in regard to FHA financing, will allow a borrower to build alternative credit; that is, a credit history that does not report to the traditional bureaus such as Experian, TransUnion, and Equifax, (cell phones, telephones, monthly utilities, monthly insurance payments, etc.) but even that is getting more difficult with many lenders.
If you've had no credit, your best bet is to get yourself a couple or three credit cards with low borrowing limits (which is probably all you can get the first time out), use them to charge dinner at a restaurant once a week or so, and then pay off the balances in full every month. Do this for about six months and you should have a reasonable credit score. But don't be tempted to let your balances grow on these new cards, because that's a surefire way to get your credit score below 620- the minimum required by most lenders these days to consider you for a mortgage.
Income - As a general rule, a borrower must have at least two years of employment history to be considered for a mortgage loan. An exception can usually be made if the borrower was in school for the last two years, eventually to be certified or degreed in the field in which he works. This is very common for school teachers, for instance, who have just received their credential, and have just signed a contract with a particular school district.
A break in employment history over the last two years for more than just a month or two can be problematic, especially if prior to that period there is not an obvious stable work history.
If you're self-employed, you need to be able to prove it with two years' tax returns.
The lender will average your taxable income; that is, income you're paying taxes on to the IRS, to qualify you.
But beware, if the most recent year shows less income than the previous year, only that most recent year's income will be averaged. The good news is that depreciation shown on your Schedule C can be added back into the qualifying income, as it is considered to be only a paper expense, and not an actual drain on cash flow.
Now before you decide to kill the messenger, keep in mind that with the restrictions I've set forth in this report (and this is barely scratching the surface), it's important to know where these "guidelines" are coming from. They're either emanating from agencies, such as Fannie Mae, Freddie Mac, FHA or VA, or from lender overlays in an effort to keep their own default rates low.
For example, in the case of FHA, if a lender's default rate goes 200 percent higher than the average of other lenders in their area, they're put on watch. If they break 300 percent, their FHA lending authority is revoked. And that is a primary reason why many FHA lenders, for instance, have underwriting overlays over and above the requirements set forth by FHA.
What this all comes down to is preparation. One needs to be prepared to enter the gauntlet of mortgage financing, and it's usually best to engage the services of a seasoned mortgage professional to help you through. Hopefully, the reward of homeownership is enough of a prize to entice a buyer to be proactive in preparing for the loan approval process.
Brian Weide is branch manager of SunStar Mortgage Services. He can be reached at brianweide@prodigy.net or 909-483-3212, ext. 243.
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