There are only 4 things that lenders need to
consider when qualifying your clients for
a mortgage loan.Â However, each category has so many â€œwhat
ifâ€™sâ€ and variablesâ€”
and thatâ€™s where it gets complicated!Â
Iâ€™d like to start with the basics and give
you an over all picture of what I have to consider
with any person applying for a mortgage loan.
They Have To Have Income!
Because most mortgages have monthly payments,
I must determine if the borrowers have enough money coming in each month to pay
their bills, eat, buy clothing, support their family AND still have enough
money left to pay a mortgage payment and utilities!Â
Thatâ€™s where the two â€œratiosâ€ come inâ€”the
â€œhousing payment ratioâ€ and the â€œdebt-to-income ratioâ€.Â Â The 1st ratio is where I take all
the gross income (not net income), figure the monthly mortgage, taxes,
insurance and PMI insurance and divide it by your borrowers gross income.Â That number should be 33% or less.Â
The 2nd ratio also uses the total
gross income.Â Not only is the total
proposed house payment considered, but every single debt that the borrower
has.Â And by debt, I mean credit cards, car
payments, student loans, child supportâ€”what they are legally obligated to pay
on a month basis.Â Taking that total and
dividing it by the gross income, it should not exceed 45%.
The tricky part?Â Determine what income to use.Â What cannot be used is cash income, short
term income (part time job they just started) or income that may not continue
for at least 3 years into the loan.Â
Oh, and the ratios also depend upon the type
of loan program.Â If you use these
ratios, youâ€™ll be pretty safe for virtually any loan type.
They Have to Have Cash!
Depending on the loan program, the borrower
may not need any money (USDA or VA), 3.5% down (FHA) or 5% to 20% down
(conventional loans).Â Also, depending on
the loan program, they may get away with getting a gift of cash for family
any case, we look for â€œcash reservesâ€.Â
What that means is that we donâ€™t want the borrower to use every last
dime they have in the bank (to buy the home) and have no money left over for
emergencies, home repairs and living expenses.
They Have To Have Acceptable Credit Score!
Clients have different â€œperceptionsâ€ of how
they view their credit.Â Some think that
since they missed a payment to a department store, that their credit
sucks.Â Others think that they have good
credit because they pay all their bills thru a credit-counseling agency.Â
The true indicator is their credit
score.Â And, it all depends on the loan
program the borrower applies for and their credit score requirements.Â The very minimum is 620 (and itâ€™s not that
good) with 700+.Â Lenders love those high
credit scores and will be more liberal when it comes to approving the
The House Must Be Appraised!
What a lender wants to know is -- if the borrower
cannot make their monthly payments and they have to foreclose, will the lender
be able to sell the home and recover the balance owed on the loan.Â Thatâ€™s why you see lenders â€œbalkâ€ at unusual
properties (earth homes) or require repairs to be made before closing.Â
Pictures are a critical factorâ€”including
interior photos!Â So if the sellers have
repairs to do, or in the middle of remodeling, itâ€™s best to advise them to get
it done before the appraiser visitsâ€”or it could affect the value.Â
There are Thousands of Variables!
No client will ever â€œfitâ€ into the neat
little square holesâ€”or be the absolute perfect borrower.Â Thatâ€™s where a great lender (thatâ€™s me) will
pre-approve your clients to make sure there are no surprises at the closing