In today’s residential lending environment it can be very difficult to purchase a home without proper preparation. It is more important than ever to prepare for this process as early as possible. Most of the laws that have impacted the mortgage lending business since 2008, have been built around the idea that a borrower must meet certain criteria to exhibit the ability to repay their mortgage. Unfortunately this one size fits all approach has caused an unforeseen complication. The more unique a borrower and his or her circumstances, the more difficult it can be to obtain a mortgage. In this section we will review some of the more prevalent unique and or special circumstances that can make obtaining a mortgage and therefore buying a home difficult.
Bad credit: The higher your credit score, the better the terms you will receive on your mortgage and the more options you will have available. This one might seem like a no-brainer, but in the two years leading to the purchase of a home you want to keep all of your accounts paid on time. If you have bad credit that is more than two years old, see a mortgage professional immediately to help you determine how this may impact your ability to get a mortgage. There are too many variations of bad credit to explain in detail. Your best option is to consult a mortgage professional as soon as possible.
No Credit: No credit is better than bad credit. You will be restricted to a select few programs, but there are some options out there. You will need to acquire a minimum of four credit reference letters. These can be requested from a cable, satellite, power & light, buy here pay here, cell phone, and/or home phone service provider. Be sure to mention the fact that you have no credit to your mortgage professional as soon as possible. Not all mortgage professionals have these types of programs available.
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Credit scores: Your mortgage professional will request a residential mortgage tri-merge credit report, which will show information from Experian, Equifax, and Transunion. The middle score will be used for the mortgage process not the average, highest or lowest scores. This will impact your loan costs substantially as well as loan program availability. In today’s lending environment most mortgages are initially underwritten by automated underwriting systems. These software programs place substantial emphasis on your credit score therefore it’s important to keep your credit in good standing. Please keep in mind that while it is prudent to maintain a watchful eye on your credit, using consumer services that are provided online are great, but its important to understand the credit report your mortgage professional will use is much more detailed and often provides different credit scores than those provided by these services. Scores can be much lower.
Co-signed loans: All of the credit appearing on your report will be used to calculate what you can afford, whether you make the payments on a specific account or not. In the case of a co-signed loan, you may be able to have the payment discounted from your debts during the loan process if all payments have been made on time as long as the person making the payments shows on the original financing documentation and he or she can provide 12 months canceled checks from an account with their name that does not show your name as well. If all these documents cannot be produced, the debt will count against you. Try to avoid sharing your credit; it can cost you dearly when applying for a home loan.
Authorized user accounts: When reviewing a loan, the underwriter is trying to figure out whether or not you have the ability to repay the mortgage. Unfortunately, authorized user accounts are accounts where the borrower has been authorized to use someone else’s account and not their own. Technically it has not been their responsibility to ensure the account has been paid in a timely fashion as per the terms of usage. These types of accounts, at times, must be disregarded as part of the borrower’s credit profile. If most or all of the credit report is comprised of authorized user accounts, as in the case of young borrowers, credit may be impacted substantially when these accounts are disregarded. Speak to your mortgage professional as soon as possible to determine how this may affect you.
Disputed accounts: Credit is an important part of our lives as Americans and can impact us financially in many ways. While it is perfectly legal to dispute erroneous information appearing on a borrower’s credit report, there must be final resolution on a disputed account prior to applying for a mortgage. Disputed accounts are not taken into consideration in the scoring model used by the credit reporting agencies. When a loan is underwritten to determine whether or not a person qualifies for a mortgage, the underwriter needs all of the credit appearing on a credit report to determine payment history and legitimate credit score. This means that you will need to resolve every dispute so that the mortgage provider can take all of your credit into consideration, including accounts, once disputed.
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Cash is not king: In a real estate transaction, every penny must be sourced. There are several reasons for this requirement, but I will focus on the most important of them from a loan qualifying perspective. The bank wants to know the precise amount of a person’s personal investment in the transaction. It has been determined, after years of research, that the more money an individual invests into the purchase of their home the less likely they will go into default. Keep things simple. Maintain one account for the purpose of buying a home and make sure the only deposits going into the account originate from payroll. Payroll deposits appearing on your statements are your source of income. Any other deposits must be sourced and can cause huge problems, during the underwriting process. It’s important to note that any other accounts showing transfers to and from this particular account will need to be documented as well. Keep this account isolated so that you do not have to deal with any additional accounts, their deposits or mountains of paperwork. Heed our warning and keep things simple.
Cash-to-close: During the loan process, a team of mortgage professionals will advise of the amount needed to purchase a home at the specified target price. Keep in mind that you will need to account for down payment, closing costs, pre-paids and reserves. Most first time homebuyers have a tendency of confusing down payment with cash-to-close which can be much higher. You must have all of the cash-to-close by the time you request a mortgage pre-approval from your mortgage provider. It’s important to consult your mortgage professional on this matter so that you can prepare accordingly.
Retirement funds: Think long and hard before using retirement funds to purchase a home. You will be taxed on your current tax bracket and hit with an additional 10% penalty by Uncle Sam if you are not of retirement age. Use these funds as a last resort and consult an accountant for the best approach to limit exposure to unnecessary taxation.
Gift: Gifts from family members are allowed on most programs. There can be restrictions, therefore let your mortgage professional know up-front of your plan for attaining these funds for closing. Please keep in mind that a loan is not the same as a gift. Non-collateralized loans such as credit cards will be disqualified and cannot be used towards the purchase of a home. A loan backed by assets such as real estate and regular property such as jewelry, cars and boats is allowed, as long as the payment for the loan is used, during the underwriting process to determine affordability. Additional documentation may be required.
Down payment assistance programs: You may qualify for a down payment assistance program. Please keep in mind these programs have guidelines, which must be met in order to qualify. Income, credit and assets will be reviewed by the non-for-profit or government organization to determine if you meet the criteria. Normally all parties to the transaction must be approved by these entities. If you will be using a subsidy program let your Real Estate Agent, Mortgage Lender and closing agent know as soon as possible.
Employee: Regular employees generating income strictly by salary are straight forward and relatively easy to qualify as long as they generate sufficient income to qualify. Once overtime, commissions or bonuses are added however, the process becomes more complicated. An average of this additional income must be calculated over the past two year period to determine a borrower’s final qualifying income, therefore a two year history of receiving this additional income must be documented. If the borrower generates solely commissions, a two year average will be used for qualifying purposes.
Two jobs: For some Americans, the only way to afford their every day needs is to have two jobs. While both incomes can be used to qualify for a home loan, there are some restrictions. You must hold both jobs for at least two years if you want to qualify for an FHA loan and your part time for a minimum of one year if you wish to qualify for a Conventional Loan. Your mortgage professional can help to determine if both incomes qualify.
2106: Unreimbursed employee expenses: More and more employees in today’s work environment must fund work expenses out of their own pocket and therefore submit these expenses to their accountant at the end of the year to get the financial benefit of writing-off the expenses and saving money on their taxes. Please keep in mind that this affects the employees qualifying income negatively. If you generate all of your income from commissions or more than 25% of your income via any income stream outside of salary, this can have a negative impact on your income and ability to qualify.
Self Employed: Self employed borrowers will require a more detailed analysis, because of the various ways in which they can file their tax returns. An in-depth analysis is the best way to determine their maximum qualifying purchase price. It is prudent for this type of borrower to begin the mortgage pre-approval process as soon as possible, because their income is based on the net and not the gross, which can greatly limit their ability to purchase a home.
Aggressive tax filing: Uncle Sam gives each American many ways to save on their taxes. In the two years leading-up to the purchase of a home, you want to be as frugal as possible in your personal and business expenditures. Aggressive tax filing can be detrimental to getting a home loan. Meet with your mortgage professional today to see where you stand.