Eugene Loan Guy

What are some of the things that you need to know about loan qualification that you might not know? Being in the finance industry for over 25 years, I often forget that not everyone has my experience or knowledge about mortgage loan programs and how you can or can’t qualify for them.  There have always been the three C’s or mortgage financing, Credit, Collateral and Capacity. Credit is self explanatory, collateral refers to the property being purchased or refinanced and capacity refers to the ability to pay. This is not an all inclusive list and I know there will be some that will be specific to you that I will not address, but there are some pretty good highlights. Some of the things you see here are fairly new changes, some have always been this way.

1. Employment and Income (Capacity): Self employed people should be self employed for a minimum of two years with at least one year’s tax return (preferably two) showing a sufficient income to budget.  I know it is best to write off as much income as possible so you don’t have to give it to Uncle Sam, but if it doesn’t show, we can’t count it. There are adjustments for depreciation, but that is about it any more. Tax returns with no income were fine for stated income loans, but those no longer exist. Also, if you are a contract employee or on commission income, that is the same as being self employed. If your are on commission and write off un-reinbursed employee expense, expect that to be subtracted from your income. If you have a choice of being a contract employee or a regular employee, take the later. Self employment income will most likely be averaged but can also take the lowest yearly income. Spikes in income must be explained. Debt ratios are being more contained. Many lenders are not accepting debt ratios over 50% even if the automated underwriting system approved the loan at a higher debt ratio.
2. Credit: Credit is very, very, very, very important in today’s lending environment. FHA loans are available (at a higher cost) below the 620 credit score but can be very hard to come by. VA and USDA are not credit score driven, but is a consideration also. Conventional loans below 740 start having charges for the credit score depending on loan to value.  The higher the credit score, the better you will be in getting a loan. Whereas the standard used to be 680, the new standard is 740. Credit scores run from 300-850. I have never seen the minimum  or the maximum but have seen some that were close.
3. Bankruptcy (Credit): It is two years from the discharge date of the Bankruptcy before you can get a loan through FHA or VA. It is  4 years with a conventional loan,  or two years with extenuating circumstances (like death, your own might qualify). Since you will need to be waiting, this will be a good time to be getting everything else in order. You will need a minimum of 3.5% of the purchase price for down payment on FHA. For a $150,000 purchase, that means $5,250 just for the down payment. The closing costs will be about the same amount but often can be paid by the seller. You will need to keep your credit immaculate. Do not have any late payment on anything. After a BKO, the underwriters are a lot more stringent on your credit. Currently, to get the best rate on an FHA loan, you will need at least a 620 credit score. That means time from when your BKO was filed (time helps derogatory credit) and current payments on current credit. Also, make sure the credit bureaus are reporting your credit properly. If you have an account that was charged off in the BKO, make sure it reports as included in BKO.
4. Foreclosure (Credit): It must be a minimum of four years from foreclosure before you can get a new mortgage loan. Short sales are not foreclosures. Deed in lieu of foreclosure is a foreclosure.
5. Property (Collateral): Loan to value requirements have changed over the past year. Now, it take a minimum of 3.5% for down payment on an FHA loan, 5% on a conventional loan, and 20% on a conventional investment property loan. VA and USDA Guaranteed Rural loans are still available to 100% with no down payment requirements. Additionally, there is a limit as to the number of financed properties you can own and get a conventional loan for the purchase or refinance of anything but your primary residence. FHA, VA and USDA do not allow investment purchases. Streamline refinances for FHA and VA are available. This is making it harder for investors to purchase homes in today’s market place. Appraisal have gotten more stringent. Comparable values must be recent and nearby. Review appraisals are often done to ascertain the corrent value. Some loans actually require two separate appraisals.

That is all I am going to cover in this installment, but I am sure I will have more as time goes on. The 3 C’s of mortgage lending, Credit, Capacity and Collateral are the important items of mortgage underwriting. Over the past few years, the industry got away from the balanced approach and startled ignoring credit and capacity and now have difficulty with collateral. This is a new ball game for a lot of lenders. For me, it is back to basics. Call me to find out if you are weak in one of these three areas and let’s see what we can do to get you on the right path.

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