Mortgages Explained: Getting a Mortgage Doesn’t Have to be Stressful

by Mortgage Nerd on April 5, 2011 · 0 comments

Unless you have been living under a rock for the last 5 years you have probably heard from a family member, friend, or coworker about how difficult it can be to get a mortgage. It’s true that lenders have become more strict regarding the credit worthiness of those applying for a mortgage but the loan process does not have to be a stressful one. With a basic understanding of loan underwriting guidelines and some tips from  a loan officer’s perspective, it can be a pleasant experience.

Underwriting Guidelines for Your Income, Equity, and Credit

Income: When looking at your income, the underwriter (person that determines if you get the loan or not) will use certain criteria to determine how stable your income is. Below are some answers to some of the most common income and employment situations.

  • What if I am self employed? If you are self-employed or paid 1099, the underwriter will require 2 full years of self employed tax returns before you can be approved for a loan. The underwriter will take an average of those 2 years to determine your monthly income. Many self employed borrowers may find that they can’t write off as many deductions as they did in the past if they want to qualify for a mortgage. It may behoove you to speak with a loan officer before you file your tax returns to find out how much income you need to report. A common pitfall for some self-employed borrowers occurs when their most recent tax return shows decreasing income from the previous year. Without a good explanation for the decrease, this is reason enough for some underwriters to deny the loan.
  • What if I am paid commission income? Just like the self employed, you will need a 2 year history of those commissions before the underwriter will consider them on your loan application.
  • What if I am employed part-time? Again, a 2 year history will be required before that income can be considered on a loan application.
  • What if I just graduated from college and am starting my career? The nice thing about college is that it counts as employment history on a loan application. As long as your new job is a salary position you can use that income on a loan application right away. If it is an hourly paid position, it is up to the underwriters’ discretion but I have seen underwriters allow hourly income after just a few months on the job.
  • What if I have seasonal employment? You will need a two year history of this employment and a letter from your employer explaining that you are still considered an employee even in the off season.
  • What if I just switched jobs? As long as it is a salary paid position, you will only need to provide 30 days worth of pay stubs to be able to use that income on a loan application.

Equity: On a purchase transaction, equity refers to the size of your down payment. On a refinance equity refers to the difference between your loan amount and the appraised value of your home. From the underwriter’s perspective, equity is your skin in the game and the more equity you have the stronger your loan application.

  • What if I don’t have a down payment? There are a few programs available that offer 100% financing. If you are a first time home buyer you may qualify for your state sponsored 100% program (i.e. Utah Housing Loan). If you aren’t a first time buyer and you don’t have a down payment, you may qualify for a USDA or VA loan. If those 2 programs aren’t options for you, try buying a HUD home with just $100 down.
  • What if the down payment is coming from a gift from my parents or other relative? This is acceptable for FHA loans but make sure your parents know that they will have to provide copies of their bank statements to show the underwriter where the money is coming from. They will also have to sign a gift letter stating that the money is in fact a gift and does not have to be paid back.  If you are getting a Conventional loan, you can still receive a gift from family but if it is less than 20% down you will be required to put at least 5% of your own money down.
  • What if I am selling something to come up with the down payment? This is also acceptable but it’s all about the documentation. Make sure that there is a paper trail for everything. Get a bill of sale for whatever you sell and don’t accept cash. The underwriter can’t verify cash and you won’t be able to use the funds for down payment unless it’s been in your account for over 60 days. Also, keep a copy of documents that prove your ownership in the item (e.g. Car registration/title, receipts).
  • What if I have paper cash for my down payment? Put it in your bank account right away because you will have to wait 60 days before the underwriter will let you use it for a down payment.
  • What if I want to refinance but I don’t have any equity? If you have an FHA mortgage, you could do a streamline refinance that doesn’t require an appraisal. If you have a Conventional loan, check to see if Fannie Mae or Freddie Mac are the owners. If they are, you may qualify for one of their relief refinance programs for borrowers that are underwater in their homes.
  • What if the required down payment exhausts all of my assets? This will be a red flag to most underwriters but if you have sufficient compensating factors like good credit and a stable job history than you could still qualify. The better question is whether it is wise to buy that house.

Credit: Just like your income and equity, you won’t get a mortgage unless you have some sort of credit history. It doesn’t have to be perfect but the better your score the more likely you are to have a smooth transaction in which the underwriter may overlook some other things. Not to mention getting a cheaper interest rate!

  • What if my credit score is zero because I have never had a credit card or installment loan (i.e. student loan, car loan)? Having a credit score of zero is much better than having bad credit because some lenders will accept “non-traditional” credit such as a 12 month history of utility bills or rental payments. However, if you are a year away from buying a home, it would behoove you to secure a few high quality bank credit cards to establish a credit history. This will open the doors to many more home loan options for you.
  • What if I have a bankruptcy on my credit report? With most loan programs the underwriter will require that 2 years pass from the discharge date. Also, it will be imperative that you establish some credit after the bankruptcy and stay squeaky clean on all of your trade lines. Something as simple as missing one credit card payment could kill your chances of getting a home loan for a while.
  • What if I have student loans that are deferred? Deferred student loans show a payment of zero on your credit report. Thus, underwriters will require that you get a statement from your student loan company showing what the payment will be once the loans are no longer deferred. These payments will be included on the loan application to determine if you can still afford the mortgage. On an FHA loan, if the payments are deferred for longer than 12 months than these payments can be excluded. It’s 36 months for a Conventional loan.
  • What if my credit report shows collections? If you are approved for a home loan with the collections, do NOT pay them off unless the underwriter requires it. The reason I say this is because I have seen credit scores go down by paying off old collections and this could hurt your chances of getting the best interest rate available or impede you from getting the mortgage altogether.

The Property Must Also be Approved

Not only does the underwriter look at your income, equity, and credit to approve the loan but they will also take a close look at the property. The property is the collateral for the loan. You could be a perfect borrower with a 20% down payment, 780 credit score, and debt to income ratio of 10%, but if the property you are purchasing doesn’t meet the collateral requirements of the underwriter your loan application could still be denied.

Make sure to discuss the type and condition of the property with your loan officer to make sure that it meets the parameters of the loan program that you are applying for. Here is a list of some questions that you should discuss with your loan officer before sending your application to an underwriter…

  • Is the home a single or multi-family residence?
  • Is it it a condo, townhouse, or twin home?
  • Is there an HOA? What is the HOA monthly fee?
  • Is it zoned residential?
  • Is the home located in a rural or suburban area?
  • Is it a manufactured or “stick built” home?  Log home?
  • Does the style of the home generally conform to the neighborhood?
  • What is the estimated value of the home and the rationale for that value?
  • Does the water come from a well or is it hooked up to the city?
  • Sewer or septic tank?
  • Is there acreage with the home? What is the home to land ratio?
  • What is the general condition of the home? Would you consider it a “fixer-upper”?
  • What year was the home built?
  • If it was built before 1978, is there any chipping paint?
  • What is the condition of the roof?
  • Is the home on slab or is there a crawlspace? How deep is the crawl space?
  • Is there a basement? Are there egress windows?
  • Is there any other feature of the home that you feel like your loan officer should know about?

In my experience the approval of the property is a topic that should be discussed in much more detail by the Realtor and loan officer at the initial meeting with their clients. Believe it or not, the answer to every single one of the questions above could affect the type of loan and interest rate you could get. It’s important to discuss these questions with your loan officer early in the loan process so as to avoid unnecessary delays and headaches when these issues inevitably come to the underwriter’s attention.

Preventing More Headaches from the Loan Process

There are a few other things that you should and shouldn’t do to save yourself a lot of grief during the loan process. You may be tempted to roll your eyes while reading the following list of Do’s and Do Not’s because some of them may seem kind of ridiculous. Keep in mind that we no longer live in 2006 when you could breathe on a mirror and get a mortgage. Believe it or not, underwriters will go to great lengths to make you document anything and everything about your financial life. Do yourself a favor and just follow my advice…

  • DO provide all documentation to your loan officer in a timely manner.
  • DO provide all pages of bank statements, even if pg. 5 has nothing on it.
  • DO keep a copy of all pay stubs and bank statements for the previous few months before your loan application.
  • DO file your 2010 tax returns on time
  • DO NOT quit your job before the loan closes, funds, and records!!! (I have a horror story about this)
  • DO NOT make any large purchases (especially not on credit).
  • DO NOT make any large cash deposits into your bank accounts.
  • DO NOT make any large deposits without keeping a paper trail.
  • DO NOT transfer money from one account to another without asking your loan officer first.
  • DO NOT be late on any debt obligations or rent payments.
  • DO NOT make any large financial decisions without consulting with your loan officer.
  • DO NOT black out account #’s or anything else on your bank account statements. You will have to provide new ones.
  • DO NOT amend your tax returns before closing.

I am confident that if you follow this advice that you will save yourself a ton of stress. Even in the current real estate climate,  mortgages can still close from start to finish in 30 days or less.  You just have to be prepared.


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