The mortgage process has undergone a series of dramatic changes over the last decade. Most of these changes have been done for the benefit of the consumer. Caps on fees, interest rate protection, closing document review, and independent appraisals are all geared at giving the consumer direct knowledge of the deal they are getting into. With this, there is also some downside. The biggest complaint is with the difficulty of approval. Long gone are the days of stated income loans and seven day closings. Today’s loans require full income documentation along with stricter guidelines regarding down payment and credit score. To get a mortgage in today’s market you need to be as prepared as ever. One late payment on an old account can make the difference in approval and denial. If you are looking to get pre approved, here are five items that you need to know.
- Credit Score. Everything starts with your credit score. You can be willing to put down 50 percent of the purchase price but if your credit is poor, you may have trouble finding a lender. There is more to your credit than making payments on time. This is certainly a big factor, but far from the only one. Availability of balance, number of open accounts, and length of these accounts also plays a factor. If you are maxed out, or nearly maxed out, on multiple accounts, your credit may not be as strong as you think. Credit scores range between 350-850. Anything under 550 is considered poor and only a large down payment would be considered. 600-650 is fair, but that range would also require an above average down payment. Your goal should be to come in at least over 700 – with 720 considered excellent. If you haven’t looked at your credit report in some time, you should obtain a copy online. A few old accounts can do real damage if you are not careful. If you are interested in buying a property, you need to know what’s on your credit report.
- Down Payment. Your credit score will usually dictate the amount of down payment you are required. The lower the score, the higher down payment you will need. Most investment loan products require anywhere from 15-25 percent down payment. This money needs to be liquid in an account for at least 60 days. Lenders are very strict on what is called sourcing and seasoning of down payment funds. It is not enough to have cash on hand or money from other accounts. It needs to be in whatever account you are using for at least two months. Transferring of funds is acceptable as long as you have two or three months of statements showing the funds in the account and then transferred. This can be a lot of paperwork but it is required on every purchase transaction. Even if you have enough to cover the down payment and closing costs, it may not be enough to get qualified. If you are considering making an offer, you should consolidate your funds sooner rather than later.
- Income/Debts. One of the reasons that the stated income loan was so popular last decade was for the ease of transaction. Instead of showing dozens of pages of tax returns, bank statements, and work receipts, you could simply state the income you made. Almost all of those products went away last decade. With today’s loans, not only do you need to verify your income, but also your debts can not exceed a certain threshold. Having a strong income may not be enough to get approved. Lenders look at your level of debt in relation to your income. Lenders will take the minimum monthly payments on all the accounts on your credit report plus your proposed monthly mortgage payment and divide that by your gross monthly income. Depending on the lender, that number needs to be anywhere between 40-45 percent. In some cases, it may make sense to pay an item off before you start the application process. Either way, you need to know exactly what your usable income is and all of your debts before you get too far into the process.
- Assets. It may not be enough to have down payment and closing cost money. Depending on your credit score and loan approval, you may need to have additional funds available. These assets – called reserves – can be anywhere from three months to a year of the new loan payment. These funds do not necessarily need to be liquid, but they have to come from an approved source. Checking, savings, stocks, bonds, and your 401k would all work for assets. These assets are required to decrease the risk of default and to improve the strength of the loan approval. Most investment loans currently require some amount of assets in addition to the down payment.
Most loan approvals are currently taking anywhere from 30 to 45 days. Much of this depends directly on the borrower and how responsive they are. Not only do you need to have all of these items ready before you apply, but there are a series of emails you need to acknowledge once the process begins. If you are prepared from the onset, the approval process is not as difficult as you may have heard. Before you do anything, you should know where you stand as far as credit, income/debt, down payment and assets.
