If you think that having a 740 credit score is all you need for mortgage approval, you may be in for a rude awakening. Sure, a good credit score is the basis for any loan application, but the process is filled with landmines every step of the way. Seemingly small details, like having multiple deposits on a bank statement or the condition of the paint on a deck, can cause delays. Moreover, some complications may result in rejection. Regardless if you are applying for a loan or selling a property, you should know the four pillars of loan approval. Understanding this process will give you an edge over your competitors.
Credit score, income, employment and down payment are the four pillars of the loan approval process. Your approval, interest rate and program will largely be based on a combination of these four items. That being said, these four are not the only factors that constitute loan approval. In each of these areas, there are specific guidelines and requirements that must be met. There are also items that are out of your control: the appraisal, insurance and the title. The more you know about how to handle the items you can control, the more likely your loan will be approved.
You need to know that one missed payment can impact your credit score. Something as small as a missed payment from your local retail store can cause your score to go from a 723 to a 701. This may not seem like a huge difference, but many of the investor programs have a minimum score of 720. That small drop could make you ineligible for a program or require you to put down an extra 5 or 10%. In addition to late payments, if you open or close a card, transfer a balance or even have your credit pulled, it can lower your score. Once you have started the loan process, it is best not to do anything but monitor your credit and stay current on any and all liabilities.
There may be a difference in how you calculate your income and how a lender will. Income from part time or full-time jobs can only be used if you have received it for a certain period of time, usually twelve months. This may seem like common sense, but any income that you do not document, like tips or any other side jobs cannot be used. The same goes for if you do not show the full rental income you receive on your tax returns. Without a lease or cancelled checks, you may not be able to use that rental income. That income can be the difference between lowering your debt-to-income ratio under lender limits and looking at alternative programs. Your lender or mortgage broker should be able to quickly calculate your ratios once they have your credit report and your income documentation. If they are just going off your word and you have included part time or other ineligible income, you could be wasting your time looking at properties you won’t be approved for.
To be eligible for a loan, you have to be currently employed. There are some exceptions for borrowers receiving social security or a pension, but generally speaking, you need to be currently employed. You may also need to be in the same line of work for the previous two years. This is especially the case if you have changed from a w2 employee and started your own business. All self-employment income can only be used if you have been in the business for the last two years and your income is trending upwards in that time. Lenders will qualify the income off of the adjusted gross income number – meaning you may have great profits, but if the bottom line doesn’t work you won’t get a loan. This is another step that you should get out of the way with a professional before you start the buying process.
The down payment may seem like the easiest of the four pillars to understand, but this is often where many loan problems lie. It is not enough to just have the money. You need to have it seasoned in an account for at least 60 days. For most investment programs, this money has to be your own and cannot be a gift. You also need to document any large deposits and withdrawals made on the account for the previous 60 days. Additionally, you need to show a paper trail showing the deposits or withdrawals going into other accounts. This step has made the loan process, especially for investors, painstakingly more difficult than it was in years past.
There are also many problems that arise on the appraisal. The same goes for the title and the insurance. Just when you think you have finally made it to the finish line, you still have to get through the closing. The loan process is much more difficult than it was even a few years ago, but it is far from impossible to get a loan. The first step is to meet with a loan expert and have all of your income, asset and employment information ready to provide. Ideally, your application will be easy enough and you can start looking at houses. However, if you are like most borrowers, you will need to clean a few things up before you get to that point. It is better to know what you need upfront before you get started in the process. This can save you time and money and can also help you close quickly when you find a property you like.