Mortgage Approvals and Compensating Factors
Mortgage loans are approved based on a fairly strict set of guidelines. Some of the guidelines are hard rules that can not be broken. An example of hard rule is the maximum loan to value ratios or down payment requirements. If a home loan for a particular 30 year fixed rate mortgage requires a 5% down payment or a loan to value of 95%, 4.75% down payment will not be accepted. On the other hand, some rules are general guidelines.
An example of a general guideline is the debt ratio requirement. Standard debt ratios are approximately 32% for the amount of the borrowers’ gross monthly income that can be used for the monthly mortgage payment and a 38% ratio representing the amount of the gross monthly income that can be allocated for the monthly mortgage payment and all other monthly debt obligations. These debt ratios are guidelines. A home loan applicant that has debt ratios of 33% and 40% may very well be approved for a mortgage loan.
In situations where a home loan borrower has debt ratios that exceed the guidelines or perhaps a credit history that is slightly below the requirements, a mortgage lender will look for compensating factors to justify making the home loan approval.
Compensating factors that may be used to justify approval of mortgage loans with ratios exceeding the benchmark guidelines are evaluated on a case by case scenario. Any compensating factor used to justify mortgage approval must be supported by documentation with the mortgage lender.
Common compensating factors that are reviewed to approve a home loan that is just marginally beneath the loan guidelines include:
The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12-24 months.
The borrower makes a large down payment, one that is above the minimum established for the home loan program applied for, toward the purchase of the property.
The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.
A previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.
The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits.
There is only a minimal increase in the borrower’s housing expense.
The borrower has substantial documented cash reserves (at least 3 months worth) after closing. In determining if an asset can be included as cash reserves or cash to close, the mortgage lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so, absent retirement or job termination.
Funds borrowed against these accounts may be used for home loan closing, but are not to be considered as cash reserves. “Assets” such as equity in other properties and the proceeds from a cash-out refinance are not to be considered as cash reserves. Similarly, funds from gifts from any source are not to be included as cash reserves.
The borrower has substantial non-taxable income (if no adjustment was made previously in the ratio computations)
The borrower has potential for increased earnings, as indicated by job training or education in the borrower’s profession
The home is being purchased as the result of relocation of the primary wage earner and the secondary wage earner has an established history of employment is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. The mortgage loan underwriter must document the availability of such possible employment.
Mortgage Loans and the role of the Secondary Market
The secondary market is where mortgage loans are sold by mortgage lenders and banks and purchased by investors. The secondary market provides a number of benefits for mortgage originators and mortgage lenders, which in turn provides benefits to home loan borrowers.
In order for the secondary mortgage market to work effectively and efficiently, uniform mortgage lending standards needed to be established. The secondary market promoted standardization and uniformity of credit requirements, loan types and loan documents and required forms. This standardization could be a detriment to those potential home loan borrowers that needed special financing but a standardized market improves mortgage rates and greatly facilitates the home loan borrower’s process of comparing and shopping mortgage rates and terms.
Providing liquidity to the mortgage market so that mortgage lenders and investors can buy and sell home loans is the primary value and function of the secondary market. A market to buy and sells mortgage loans allows the mortgage lenders to offer competitive mortgage rates and keep and continual flow of funds available for mortgage lending.
The secondary mortgage market permits mortgage lenders to obtain cash required to fund new home loans at any time. The liquidity in the secondary market also encourages investors to participate and purchase home loan and mortgage backed securities, as the investors can be confident that the home loans can be readily sold at a later time if necessary. The liquidity in the market provides a constant flow of new money into real estate finance that helps to maintain and orderly and competitive market.
Liquidity that is inherent in the secondary market also allows the mortgage lenders to manage their interest rate risk. Mortgage lenders not only have the ability to sell the mortgage loans they originate but they can buy mortgage loans with different terms and mortgage rates to maintain a diversified mortgage loan portfolio. An investor in mortgage loans or a mortgage lender can buy home loans with different mortgage rates and within different geographic areas.
From the mortgage lenders perspective, risk that is in mortgage lending that can be ameliorated through the secondary mortgage market includes interest rate risk, liquidity of funds risks and potential default risk through loan portfolio diversification.
The major institutions that which invest in the secondary mortgage market include the Federal National Mortgage Association or FNMA, the Federal Home Loan Mortgage Corporation or FHLMC, the Government National Mortgage Association or GNMA and a variety of banks and institutional investors.
FNMA, FHLMC and GNMA are government sponsored enterprises that guarantee mortgage loans, purchase mortgage loans and establish portfolios of loans for sale as mortgage backed securities. FNMA and FHLMC operate with conforming loans while GNMA handles FHA home loans and VA home loans. The majority of home loans that are closed meet the lending criteria that are established by one of these entities. Home loans that are originated that do not meet the guidelines established by these entities are often referred to as portfolio loans since the mortgage lender is not concerned about loan resale and holds the mortgage loan for their own portfolio.
Tips for a Fast Home Loan Approval
As a potential home loan customer, everyone wants to search and find the best mortgage deal and the best mortgage rate that they can. It seems everyone in the market for a new home loan is looking for the best mortgage rate for the lowest costs on a loan they can have right away without delay. For some prospective borrowers that find a mortgage lender or mortgage broker that is well respected and skilled, it is likely they will not have any problems in your search.
Sometimes, however, choosing the best mortgage lender doesn’t always equal a deal that is done the most swiftly. Mortgage loans that are not completed in a timely manner may unfortunately result in higher costs. Delays may bring higher costs due to a purchase not closing on time, higher costs to pay for additional services to complete the home loan transaction or higher costs due to the expiration of a mortgage loan lock that results in a higher mortgage rate.
If your home loan is supposed to close within 30 days but it winds up taking longer you may have to pay a higher interest rate because of the delay or worse experience a lost opportunity because you didn’t get the funding in time.
It is important to be able to evaluate the services of your mortgage lender or broker so you know what the home loan approval process entails with that mortgage lender so the loan closes in a timely fashion without extra costs and headaches. The first task should be to have some knowledge about the mortgage loan process as a whole. Knowing the different steps in the mortgage process will help avoid delays and unnecessary halts in the loan process and closing.
The first part of this process is the mortgage loan application and the submission of supporting documents. If the mortgage application process is not done right, the mortgage loan approval process gets off to a rocky start that will often lead to problems and delays.
It is in your best interest to make sure that your mortgage lender or broker has all of your personal information that is needed, and that the information is accurate and correct. Often a delay can be because of simple errors that are easily avoided.
This errors may slip by because the borrower did have the accurate information to complete the loan application or supply the necessary supporting documents or the error may occur because the home loan borrower did not think it was necessary to fill in all the details on the mortgage loan application or the loan officer was more interested in getting the loan application into processing rather than making sure it was completed properly. Whatever the reason, a simple rule is that the more information there the easy the process becomes.
When you complete a mortgage loan application it is important to make sure you fill out the application completely. The mortgage loan application details, among other things, your income, assets, and a description of the home you plan to buy or refinance. The application and the supporting documents is the most important step in the home loan approval process. This is where the information is garnered to calculate income, credit and debts outstanding. A well documented application helps avoid errors and improves the speed at which the data can be verified.
The process of completing and submitting the home loan application requires documents such as W-2’s and tax returns for the last two years, pay stubs covering a 30 day period, bank statements for the last two months, the purchase contract or a mortgage statement of the mortgage loan is for a refinance. Recent credit card account statements may also be routinely required.
Here are Some Easy Steps to Submit a Complete Mortgage Loan Application:
Double check that there are no spaces or blanks left on your mortgage application before you sign.
Make sure that when you sign the agreed terms spelled out in writing are what you are expecting, and do not be afraid or be shy about asking questions before you sign.
Anything you do not understand, don’t hesitate to question your mortgage lender before you sign. If there is a delay it won’t be because you didn’t understand what the process was.
Make sure you keep copies of all the documents and important papers and have them handy to produce if required.
Make sure you have given the data requested. Stress this point with the mortgage lending institution. If you give them everything they requested, the ball is firmly in their court to close the loan.
Make sure you understand all of the mortgage loan features, what they mean, and what may be available for other home loan programs. This includes the bottom line for what you are responsible to pay. As simple as this sounds, it avoids confusion and unwanted surprises.
Before submitting a mortgage loan application, search and find the mortgage lender that will give you the best service, and offer the best quotes for a low mortgage rate on your home loan. Once you find your mortgage lender, do not hesitate to give them all the financial details they need. Give them details on assets, your income, your debt situation, and your job history. After giving your mortgage lender all the information you have to give, follow up with them frequently, and make yourself accessible should they have questions and don’t be intimidated, do your research and remember this is your request; you can control many aspects of the process.
Scams with Home Loan Help
With home loan foreclosures up and consumer credit problems much more prevalent, a number of businesses have cropped up that do nothing but take advantage of homeowners that are under duress and seeking financial relief. These firms are fundamentally scam organizations. The sales pitches from these organizations can sound like a way for a home loan borrower to get out from under their troubles and their delinquent mortgage payments but often these people are in business just to take the homeowner’s money. Just plain old scam organizations preying on homeowners that have fallen behind on their mortgage payments and looking for a legitimate way out or guidance in the right direction.
The office of Housing and Urban Development has provided information on a variety of specific scams that these organizations have engaged in recently. Three scams that were highlighted include:
The foreclosure prevention specialist. With theses scams, the foreclosure specialist is far from a specialist. They are really just fake home loan counselors who charges high fees in exchange for making a few phone calls or completing some paperwork that a homeowner could easily do for himself. Often, the result is that none of the actions provided by these alleged counselors will have the outcome of saving the home from foreclosure. These scams give the homeowners a false sense of hope and delay them from seeking qualified help for their mortgage loan problems. In addition to paying unnecessary fees to the scam artist or company, the homeowner is also exposing their personal financial information to a fraudster that may lead to further financial trouble.
Some of these companies involved will even use names of government programs to try and legitimacy to the scam with the words HOPE or HOPE NOW in them. These are just more refined scam artists who are attempting to dazzle and confuse borrowers who are looking for assistance from the actual assistance that can be found for free at the 888-995-HOPE hotline.
The lease/buy back scam. In these scams a homeowner who has a mortgage that is severely past due may be deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back under certain terms. Usually, the terms of the buyback in this scheme are actually so hard to meet that the buy-back becomes near impossible, which ends with the homeowner getting evicted, and the lease/buy back operator walks off with most or all of the equity in the home.
The bait-and-switch: In a bait and switch scam, the homeowner is led to believe they are signing documents to bring the mortgage loan current. Instead, they are signing a number of legal looking papers that includes signing over the deed to their home. The scam artist then sells the home and the homeowner usually doesn’t know they’ve been scammed until they get an eviction notice from the new homeowner or mortgage lender.
Never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, a trusted real estate professional, or a HUD approved housing counselor.
Unfortunately, during tough economic times more of these unprofessional organizations surface to make a quick a buck of those home owners that are having mortgage payment troubles and are under duress. There are a number of for-profit companies that contact homeowners that have delinquent mortgage loans promising to negotiate with the mortgage lender. While these may be legitimate businesses, they often charge you a significant fee for information and services that the homeowner’s mortgage lender or a HUD approved housing counselor will provide free if they are contacted instead.
Homeowners in trouble don’t need to pay fees for foreclosure prevention help; it is a better decision to use the money that would be paid to these organizations to pay the mortgage instead.
The office of Housing and Urban Developments reminds borrowers that if it sounds too good to be true, it may well be a scam that will damage the borrower’s credit and cost more in the long run. Working directly with the mortgage lender, home loan servicer or a legitimate non-profit organization is the best approach for troubled borrowers.
For homeowners that are unable to make their mortgage payment, don’t ignore the problem any further. The further behind in the mortgage loan payments a borrower becomes, the harder it will be to reinstate the home loan and the more likely that they will lose the house. There is a lot valuable information available regarding foreclosure prevention or loss mitigation, be sure to check that you are working with a reputable organization or directly with your mortgage lender before going forward.
Mortgages and Being a Successful Landlord
If you are ambitious, energetic, smart, and have some money and good credit, owning a rental property might seem like a great idea, but you also need a wide tolerance for the many things that can go wrong. The challenges are always there, especially if you are taking the hands on approach to property management.
There are also many legal and logistical hurdles, and you need the right accountant and lawyer to make sure you are on the right path. There’s a lot of work involved in being a landlord, and if you don’t do it right, you can end up losing money.
Mortgage loans used to acquire property for rent have a higher standard than other mortgage loans. Home mortgages for rental properties will require a larger down payment and entail a slightly higher mortgage rate.
Mortgage lenders view rentals properties or non owner occupied properties as home loans that entail a much greater level of risk. Since the risk is higher for the mortgage lender the standards to become approved for a mortgage that is used to purchase a non owner occupied property is more rigorous.
The starting point of the tighter lending standards is a larger down payment than there is on a standard owner occupied home loan. On top of that requirement, the mortgage rate will normally be at least ½ of a percent higher. The closing costs may be higher as well since non owner occupied purchases usually require more discount points by the mortgage lender. The remainder of the closing costs should be similar, only the points will be greater. Since must all home loans are initially evaluated using an automated underwriting model, potential borrowers will find that these models generally require a slighter higher credit history or credit score than the models used for owner occupied properties.
It may be useful to compare mortgage rates and mortgage costs with a mortgage calculator to see just how much the monthly mortgage payments will be as well as the true cost of t a new home loan to purchase a rental property.
Here’s a quick run-down of what every landlord needs to know regarding conditions that are not specific to the mortgage lenders.
Take care of the record keeping aspects of running your business. Open a bank account for the property and run all bills and rental income through that account. This will simplify your paperwork come tax time.
Finding good tenants will at times be the most time-consuming part of your business. It’s tempting to rent to friends, friends of friends, or relatives, and that can become complicated, especially if you are a bit of a soft touch and are the type of person who is willing to help folks out. This isn’t the place for that.
Think of a tenant as a kind of business partner, someone you can rely on to do their part. Check their references (speak with their previous landlords), pull their credit report and consider running a background check. The National Tenant Network and Registry SafeRent sell credit reports from the three major credit bureaus (Experian, Equifax and TransUnion), as well as more in-depth tenant reports including an eviction judgment check, a criminal report, and verification of employment and landlord references. A modest investment can get you very useful information.
Beyond that, manage your tenants professionally. Don’t become too personally involved. Cleaning up messes in a tenant relationship can be costly, time consuming, and maddening. Be firm but fair with them and they will respect you. Be tough and strong willed, and demand that they meet their obligations.
The building itself can be trouble too, hopefully not but be prepared. If you can’t or won’t pay someone else to repair problems or do standard maintenance, you’ll get used to calls from tenants at all hours complaining of pests, broken pipes, clogged bathtubs, exposed electric wires and other common problems. You need to be handy, or be willing to pay someone who is. A reliable handyman or woman is your best friend.
You should also be aware of your rights as a landlord. Normal wear and tear is something you have to pay for, but you shouldn’t have to pay for deliberate or extremely negligent damage.
You always must be prepared for the worst because even in the best of situations you will have tough days. Talk to other landlords, or join a local landlords group. People with experience have a lot of good advice to go along with some horror stories. Some will recommend that you budget for only ten or eleven months rent to cover eventual late rent or vacancies. Others will make you aware of federal and local laws that protect the rights of tenants. Here are some of the common issues that landlords must pay attention to.
Discrimination
Make sure you have legal reasons to reject an applicant, or you risk getting sued for discrimination. For example, you can’t reject an applicant solely on the basis of his or her race, color, religion, national origin, family status, gender, disability or handicap. You are allowed to refuse renting to tenants with pets or applicants who have previous bankruptcy filings, insufficient income, or lack positive references from previous landlords.
Steering
Steering is encouraging a potential tenant to take one apartment over another. Landlords can easily do this even if their intention is innocent. A landlord who says to a single mother with a teenage daughter, ‘You should take the upstairs unit or the unit in the back’: that’s called steering and it’s illegal. The landlord may have had the best of intentions but under federal and state law he or she has to allow the tenant to choose the unit they want among those that are available.
Security Deposits
One of the most common cases handled in small claims court is a landlord-tenant dispute over a security deposit. Have a clear written agreement that spells out how the security deposit works, and make sure that you are following the law. Some states limit the amount of the deposit you can collect or require you to hold it in a separate account that accrues interest. Generally, landlords can use the deposit for unpaid rent and repairs that are beyond normal wear and tear, but there may be additional state-specific limitations.
Insurance
Whether you rent out a single-family home to one tenant or an entire building with dozens of apartments, you need separate homeowners insurance for your rental properties. This type of insurance can be expensive and you should understand the costs before investing. The more units you rent and the more people there are, the more risk you have, and insurance companies will make you pay for that.
In today’s litigious climate, make sure you have enough liability coverage. If your tenant’s dog bites your neighbor’s child, they’re most likely to go after the tenant but if there’s some negligence on your part they may go after you.
Professional Management
If your finances allow it, property-management companies can do most of the heavy lifting for you. They market the property, maintain it, screen tenants, collect rent, pay the bills, prepare financial statements for you and keep up with the fair housing laws. Management company fees can be up to 10% of the rental income. If you live far from the rental property), for example, you may need a management company to run your business. You might also be better off with professional help if you aren’t especially handy or if you find that being a landlord is taking you away from your job or personal life.
Getting your business off the ground will involve some paperwork other than handling the mortgage lenders requirements. Some states require that you get a business license for your property in order to rent it out. First-time landlords should consult with a real estate attorney and a certified public accountant (CPA) before getting started. A CPA can help you figure out how much rent you should charge in order to make your business profitable, while an attorney can be priceless as you learn the intricacies of the fair housing laws, among other legal issues.
Using a Mortgage Loan for Debt Consolidation
Cash out refinance transactions for debt consolidations is a popular mortgage transaction. Cash out refinances represents a large portion of mortgage refinance transactions each year. For consumers that own a home and have a fair amount of consumer debt, a cash out refinance for debt consolidation purposes is well worth considering.
Sometimes a person can get into debt problems without much effort at all. Perhaps you have even experienced credit problems and are showing various signs of damaged credit do the debt overload. If you are willing to be disciplined, in a serious fashion and you own a home, one way out may be a cash out refinance to consolidate these debts. This may help you solve your credit and debt situation despite some of the inherent risks involved with such a home loan.
It may be possible to refinance your mortgage that you currently have with a loan amount greater than the existing loan balance. This is called cash out refinance. The extra money obtained from the new refinance transaction can be used to pay off other bills and debts. A cash out refinance for debt consolidation loan gives the home loan borrower money to pay off their existing debt, resulting in just one monthly payment and quite possibly a lot less stress. With discipline, this home loan makes it much easier to manage your budget since you only have to worry about a single monthly mortgage payment schedule. This type of refinancing option means you will pay a longer term and subsequently more mortgage interest over the life of the debt.
When applying for refinance for debt consolidation, make sure you explain this to the mortgage lender and loan officer. During the qualifying process for a refinance, the debt ratios the mortgage lender will evaluate are as if the new mortgage loan is in place. When this mortgage loan is for cash back to pay off consumer debt the application will not consider the existing payments of the debt being paid off to calculate the debt ratios.
The three key factors in evaluating your loan request will be the debt ratios, the loan to value and your credit report. In order to make sure the debt ratios are not excessive, it is important that the mortgage loan application does reflect the debts to be paid off otherwise the home loan application could result in a loan denial for an excessive debt ratio.
When you consolidate various high interest rate debts into one mortgage loan the results can be very attractive and appealing. With a debt consolidation mortgage, you do not have to pay different interest rates to creditors, or pay your creditors at different times of the month. A debt consolidation mortgage refinance combines your debts into one loan payment a month, one that you should be more manageable.
Since mortgage loans are secured by real estate, the interest rate or mortgage rate is generally much lower than that of credit cards and personal loans. And in most cases, the interest paid on a mortgage is tax deductible. With discipline, you can now budget better to increase savings or prepay on the new refinanced mortgage and extinguish all of your debt early.
Be careful; do not use the freedom of lower monthly payments to avoid getting your financial house in order. Do not increase in your unsecured debt after you consolidated through a mortgage refinance. Pay strict attention to your financial outlays and use the home loan to improve your financial health.
Benefits of a cash out refinance for debt consolidation include:
The ability to take all different types of high interest loans and combine them into one lower interest mortgage when you enter into a refinance. This pays off the higher interest debts.
Improves your credit rating by reducing the amount of outstanding debts per account.
Most mortgage loans allow prepayment without penalty, allowing the borrower to have the option of not only consolidating many consumer debt payments into one but also to pay a higher monthly mortgage payment if they choose and reduce the total debt early.
By paying off debts that may have been outstanding, you stop and eliminate debt collection activities, foreclosure, bankruptcy, and other potential negative actions that affect your overall credit status.
The process to get a debt consolidation mortgage is fairly simple. Research and shop around for repayment plan that meets your budget and risk, and find the lowest mortgage rate and closing costs that you can. Be cautious before signing anything and make sure you understand all the repayment terms, mortgage rates, and costs of the refinance transaction. Use the mortgage calculators to evaluate the mortgage rates and mortgage payment options.
Using a cash out refinance mortgage for a debt consolidation can make sense, and help overcome severe debt problems, but it does result in higher interest and higher fees. It will take discipline to make sure the new payment amount is handled in a timely fashion. You will have a longer mortgage term and pay more over the length of the loan. It is often smart to restructure your debt this way, but this does result in a larger single debt amount. For this reason it’s smart to investigate shorter-term mortgage options to try and avoid paying a larger amount of money over time.
Home Mortgages and the 4 C’s of Lending
All you need to do to make sure you have a better success rate in getting your home loan application approved at the terms you want is education and preparation regarding the process the lenders go through to approve your request. When evaluating your request for a mortgage loan, a mortgage lender will assess the application you have filled out with the supporting documents you have submitted. This process is referred to as underwriting the home loan. During this stage, the mortgage lender investigates the integrity of the data and evaluates the risks in order to qualify the applicant.
The home loan application is a summary of your assets, credit and income position at this particular point in time. It does not measure your character nor does it measure potential future changes such as potential employment changes or debts that maybe incurred or satisfied.
In order to evaluate your present position the mortgage lender will review your financial position, take inventory of your assets, income and credit profile. This procedure is accomplished by verifying your employment, verifying the funds you have on deposit with financial institutions, verifying the equity in the home by appraising the property, reviewing your debts outstanding and analyzing your credit history. This process has become highly automated with computer modeling and approvals but the underlying process is basically the same.
These criteria that are evaluated were once referred to as being the four C’s of lending or collateral, capacity, credit, and character.
Collateral - Collateral is a measure of the value, condition and marketability of the property. The mortgage lender will order an appraisal to determine the market value of your home. From here the loan to value or equity position in the property is determined. Loan to value is the ratio of loan amount to the appraised value. If the borrower is agreeing to down payment of $10,000.00 on a $200,000.00 home, the loan to value will 95%. This formula works on the refinance as well. If a borrower wishes to refinance an amount of $100,000.00 on a $200,000.00 home, the loan to value will be 50%. Loan to value (LTV) and the appraisal are the biggest factors in measuring collateral. Lower loan to values leave more equity in the property and is inherently less risky for the mortgage lender since it not only cushions the mortgage lenders risk but leaves more at stake for the borrower.
Capacity - Capacity is short for capacity to pay. In regards to mortgage qualifications the capacity to pay is measured by housing and debt ratios. The mortgage lender will ascertain the borrower’s gross monthly income first. The new housing payment on the mortgage requested is calculated as well as a summary of all contractual debt payments. Capacity is then measure by dividing the monthly mortgage payment by the gross monthly income to obtain the housing ratio and then dividing all contractual debt payments by the gross monthly income to get the total debt ratio. For example, if the total obligations of the borrower were $1,400 ($1,000 for housing expenses and $400 for other credit obligations), the housing ratio would be 25% ($1,000/$4,000 = 25%) and the debt ratio would be 35% ($1,400/$4,000 = 35%). Lower housing and debts imply greater capacity to pay a home loan back and hence lower risk.
Credit - Credit is evaluated by reviewing the credit report and the credit score. With the use of credit scoring, credit evaluation has become one of the simplest attributes of a loan request to measure. The credit is broken into three primary categories. Mortgage lenders will use credit scores, known as FICO scores, to determine the overall credit risk of the home loan borrower. From here a review of the public records such as, tax liens, bankruptcy filings, and judgments will be assessed. Finally, the individual accounts or trade lines in the credit report will be reviewed for delinquency, credit amounts, depth and length of time on accounts. Generally speaking, the higher the credit score the better the credit risk.
Character - Character is a qualitative measure of a borrower’s stability, integrity and honesty. Measuring character was mostly a measure of a borrower’s commitment to their credit and the new debt they intend to take on. Character may be classified as a measure of responsibilities with the loan commitment. Since mortgage lending and underwriting is almost entirely based on quantitative analysis, character is predominantly ignored. Since it is difficult to evaluate the risk and to even measure a borrowers character, in residential mortgage lending this gauge is rarely used.
Qualification for most mortgage loans and the mortgage rate a lender will charge depends on these three main factors. Understanding the basic guidelines and having knowledge of what a mortgage lender looks for in analyzing your loan request will make your mortgage application and homeownership experience and far smoother and less nerve racking experience.
Getting a Mortgage for Home Improvements
If you are sitting in your home pondering a major expansion in the kitchen, finishing the basement, or completing key repairs of the home, a new mortgage is one potential source of funding for such a project. Of course, there are many sources of funding for these undertakings. Cash on hand, credit cards, or even personal loans can be used to help pay for work on your property.
The key advantage of mortgage funds is that the rate you pay on a mortgage is almost always the lowest rate for consumer borrowing. In addition, the interest paid on mortgage debt is generally tax deductible (seek the advice of your financial planner or tax advisor). Furthermore, if a borrower is to take a mortgage to extract equity or cash out of the property, one of the best uses for this cash is improvements that help increase or secure the value of that property.
The three main choices for getting cash out of your property for home improvements are: a cash out refinance, a second mortgage ( including a home equity loan and a home equity line of credit ) and specialty mortgages such as the FHA sponsored 203K loan and FNMA and FHLMC home loans that are periodically introduced to assist with home improvement financing. Since the 203K loans are a seldom used product and specialty loans come in and out of favor, these home loan types will not be covered.
Before discussing the various home loan options it is important how a mortgage lender determines the equity in your home. The equity in your home is the difference between the value or price of the house and the amount of mortgage loans you owe against it. A house that is valued at $200,000.00 with an existing first mortgage balance of $145,000.00 has $55,000.00 in available equity. Though this may seem like a fair amount of equity, a mortgage lender will provide a new home loan for only a percentage of the homes total value not all of the value. If a homeowner in this scenario were to obtain a cash out refinance for 85% loan to value, the amount of money obtained would be approximately $25,000.00. This is calculated by taking 85% of the home’s value or $170,000.00 and then subtracting the existing first mortgage balance to arrive at a lendable equity figure of $25,000.00.
Mortgage refinances are one of the most common methods for obtaining cash for home improvements. Refinance transactions are often 50% or more of all the loans originated across the nation every week with a great deal of variation depending on the level of mortgage rates. A measurable percentage of these refinance transactions are to extract cash from the property. This cash is used for an assortment of purposes; most mortgage lenders will tell you almost legal purpose is acceptable for a cash out refinance.
Fannie Mae and Freddie Mac do not establish rules on the home improvements a borrower may or may not finance with a new mortgage loan. Therefore an existing homeowner can obtain a cash out refinance to finish the basement, do repairs or add a new room to the structure. There are no limitations on the minimum amount or maximum amount of financing that needs to be spent on repairs. If a borrower obtains a cash out refinance to pay for home improvements the main consideration of the mortgage lender is the condition the property is in as well as what the funds will be used for.
Standard conventional home loans are made based on the existing condition of the property. This approach results in a standard new home loan qualifying based on the as is value of the property not the as-completed value. Deferred maintenance is the term mortgage lenders use to describe a property that is in disrepair. Minor deferred maintenance does not often raise any red flags. Significant deferred maintenance will usually have to be addressed by the appraiser when they inspect your property. The appraiser will generally attribute a dollar value to the amount of deferred maintenance.
If a property is presently in disrepair the mortgage lender will not a grant a conventional loan. If the property is going to have a significant structural change the mortgage lender may also be concerned about approving the home loan. Questions may arise as to who is performing the work as well as how and when it will be completed. Oddly, even though the mortgage lender based the decision on the home loan on the existing property condition and value if a new mortgage loan is going to impact the lenders collateral significantly, they will want to make sure precautions are taken such as a licensed contractor is performing the work. The improvements should be performed by contractors who are licensed, registered, or certified or have the highest level of certification required.
Other than the limitations on the loan to value for a cash out refinance the structural changes that may be performed, a mortgage refinance is straight forward and the guidelines are the same as they are for a purchase regarding credit, income and debt ratios.
Home equity loans and second mortgages are also an option and are considered interchangeable terms. These loans are mortgages you get after you already have a mortgage loan on your property. There two distinct different types of home equity loans or second mortgages, the home equity line of credit and the home equity loan.
The home equity loan is generally a fixed rate loan that taken out for a predetermined amount and is disbursed to you at one time. The home equity line of credit is also a predetermined sum of money but instead of getting the money all at once you are given a checkbook to access the available balance of the loan. Most all home equity lines of credit are based on a variable or adjustable rate.
These loans will have similar qualifying standards as first mortgages. The borrower’s income, debt ratios, credit and the amount of the loan relative to the property value or loan to value will be evaluated. When measuring the loan to value for a home equity loan the mortgage lender will add the first mortgage amount plus the propose second mortgage amount and divide that figure by the home’s value to come with a ratio called the CLTV or combined loan to value. If a homeowner has a home valued at $200,000.00 with a first mortgage of $125,000 and requests a home equity loan of $30,000.00 the original loan to value is 63% and the combined loan to value will add the home equity loan and would be 78%.
One of the main disadvantages of home equity loan is the mortgage rate on these home loan products is higher than the mortgage rates found on first mortgages. A second mortgage home loan is considered to be a more risky loan for a mortgage lender or bank. The mortgage lender charges a higher mortgage rate over a home loan that is in first position.
Aside from acquiring the loan you may need, make sure you pay attention to the increased expenses of home remodeling. Get at least three quotes and stay within a budget. Taking cash out of your property for home improvements is generally one of the best uses of the equity, often the cost of home improvements do increase the value of your home on a dollar for dollar basis.
There is an ample supply of mortgage lenders that will offer home improvement loans available. It is up to the homeowner to decide which one is the most suitable for their needs and budget. The first step should be to find out as much as possible about potential mortgage refinancing, home equity loans and the mortgage lenders. Utilize the mortgage calculators to help determine debt ratios, loan to values and monthly mortgage payments. Closely consider important factors such as mortgage rates, and closing costs. Shop and compare home loans carefully before making a long term commitment.
Understanding the Mortgage Loan Application Process
Once you are satisfied with the mortgage lender you have chosen to handle your home loan, the next step is to begin the application process. During the mortgage loan application process be prepared to hear various unfamiliar terms that are often only used in to the mortgage loan process. Terms you may encounter include; 1003, credit score, Fannie Mae, preapproval, prequalification, subprime, FICO score, Tri-merge, compensating factors and a host of others.
Don’t be intimidated, do your research and remember this is your home loan request; you can control many aspects of the process. Use this site to review the mortgage loan terms and loan types before you apply.
Mortgage loan applications are completed primarily in four different ways; over the phone, by mail, via the Internet or in person. Either method ends in the same result, with the submission of a completed mortgage loan application regarding the type of home loan which is a summary of the borrower’s qualifications for that home loan.
The choice of how to complete your home loan application for a mortgage is based on your preference. Almost all mortgage applications, with the exception of home equity loans, use the uniform residential loan application referred to the industry by its code number, 1003 ( pronounced: 10, 0h, 3 ).
Before you complete the mortgage loan application make sure you have studied the various home loan programs available and go one step to further and review the general underwriting conditions needed to qualify for that type of loan. Shopping and comparing home loan programs and mortgage rates should be completed well before the loan application is submitted.
The application that will need to be completed details, among other things, a borrowers income, assets, liabilities and a description of the property for the home loan. The home loan application is summary of the borrower’s asset, credit and income position at a particular point in time. It does not measure your character nor does it measure potential future changes, such as potential employment changes or debts that maybe incurred or satisfied at a later date.
After the mortgage loan application is completed, the underwriter and processor will check the borrower’s credit. Credit checks will serve the purposes of investigating the credit worthiness of the borrower as well as verifying the debts outstanding. The processors and underwriting department will also proceed to verify the borrower’s assets and employment to establish adequate funds to close on the house as well as sufficient debt ratios to qualify.
Be prepared to discuss any unusual circumstances that may put a hick up in the process, such as frequent job changes, erratic income, big deposit and withdrawals in your bank accounts or delinquent credit. Generally speaking, the more information you provide the faster and easier the home loan process will be. And once you know what the mortgage lender is looking for with the mortgage loan application, it is a good decision to get a leg up on the process.
In order to be a step ahead on the home loan application process, a prospective borrower should view their credit report in advance so they know what accounts are in the report, see any delinquent accounts that will need to be explained, the account balances reflected in the credit report as well as any accounts that do not show in the credit report. In addition, take the time to review your income and assets and utilize online mortgage calculators to help determine your debt ratios and loan to value. Try to be precise with regards to calculating gross monthly income and use current mortgage rates to avoid conflicts in the future. A good source for mortgage calculators is www.selectcalculators.com.
Along with filling out the home loan application, a number of supporting documents will be needed so the mortgage lender can process the loan request. The following is a list of commonly required documents and information needed at the time of the home loan application.
Borrowers names, addresses and social security number ( a drivers license and social security is the standard supporting document).
Description of the property to be purchased or refinanced.
Names and addresses of employers for the past two years.
One month worth of paycheck stubs.
Last two years w-2’s.
Last two months financial statements ( bank, investment account, 401k, etc..)
List of all financial accounts.
List of debts, names and account numbers.
Q. If I am concerned about getting approved for a mortgage loan, what should I do?
A. Of course, the first answer is to do your research. The number one way to help the mortgage loan approval process is to be prepared and understand how the mortgage loan process unfolds.
This may sound too simplified, but with the creation of credit scores and automated underwriting, the home loan approval process is based on the analysis of a series of numbers. Numbers such as, the amount of the down payment, the loan to value ratio, the borrower’s credit scores, debt to income ratios and more are all quantified and evaluated to come up with home loan approval or denial.
What is not included is subjective analysis. Number based assessments help to eliminate discrimination since color and race is not part of the input process. But, numbers can also hurt those borrowers that fell on tough times and are now putting their financial house in order. The mortgage loan approval and application is based on your debts, income, assets and credit at a point in time. Another words, you are approved or denied for a home loan based on your credit and income and other figures today, not where you will be tomorrow.
Mortgage lenders use an automated underwriting program, usually the one’s established by either FNMA of FHLMC, and input data about your current financial situation including your credit, income, debts and assets into these systems. Taking all the necessary information, the mortgage lender determines mortgage affordability. The key to any one individuals loan approval is be prepared and have the prettiest set of numbers for the mortgage lender to input in the automated underwriting system.
One of the most important numbers input or evaluated by the automated underwriting program is the borrower’s credit score. The credit score is one of the primary indicators of your ability to repay the mortgage loan, so it’s a good idea to know it before you apply with a mortgage lender. For the most part, if your score is above 760 you can expect to get the best mortgage rate a mortgage lender has to offer; if your score is below 660 you may have trouble getting approved until you improve your credit and credit score. You can obtain a free copy of your credit report annually at www.annualcreditreport.com.
Debt ratios are another key number quantified by the mortgage lender. Debt ratios are simply a measure of affordability. Debt ratios are measurements of affordability expressed as the percent of a borrowers income used to pay for debt. Mortgage lenders want to make sure a borrower’s monthly mortgage payment does not exceed 28 percent of their income before taxes. The mortgage lender will also look to see that total monthly debt payments including the mortgage payment, car payments and credit cards doesn’t exceed 36 percent of total gross monthly income. These two debt ratios are referred to as the front end and back end ratios in the mortgage industry.
Do the math calculations on your own with one of the mortgage calculators to see how your debt ratios stack up against these guidelines. The web site, www.selectcalculators.com is great site for mortgage calculators. If your proposed housing expenses or monthly mortgage payment is greater than 28% and total debt payments, car loan, student loans and other loans, is greater than 36 percent of your gross income, you may have trouble qualifying for new home loan. In tight situations, you may want to see is if there is a way to reduce some of those monthly debt payments before you apply for a home loan.
The down payment, assets and loan to value are all related measurements. The loan to value measure the loan amount in relation to the value of the home. An 80% loan to value mortgage equates to a home loan that 80% of the home’s value. For a purchase transaction, which would mean the borrower is putting 20% down or a 20% down payment.
The assets the mortgage lender is evaluating are the funds held by the borrower needed to cover that down payment, closing costs and reserves. The reserves are a measure of funds left over after paying for down payment and closing costs as a cushion or safety net. At least two months reserves will be mandatory. This is defined as two months worth of monthly mortgage payments. More reserves will make the home loan approval easier. Once again, the mortgage calculator and a look at your own finances can tell you where your loan to value will be as well as the number of months of monthly mortgage payments you have in reserve.
All of these numbers, debt ratios, credit scores and loan to value are evaluated by the mortgage lender via the automated underwriting program. The better any of the numbers are the easier the home loan approval process will be. Really high credit scores will be approved with less paperwork than lower scores. Larger down payments are processed faster. Low debt ratios will facilitate the approval process as well.
In a perfect world you want to save for a large down payment, improve your credit score and lower your debt-to-income ratio. But, in light of that, you may simply want to know where your weak spots are regarding these factors and see what you can do to improve on them before you apply for new mortgage loan. This is a good rule whether you are applying for a purchase or a mortgage refinance.