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Understand Mortgage Lender Guidelines to Get Your Home Financed In a Difficult Economy
By plrprousers | February 3, 2009
Reality has returned to the US real estate market, but since people still need homes it is a great time to revisit the basics for getting approved for a mortgage. No longer will a mortgage lender approve a loan just because the borrower can fog a mirror. Future homeowners as well as lenders will be going back to the basics of how loans were approved for the foreseeable future. Let’s review the basics of a successful loan application.
Fannie Mae (which in reality is the Federal National Mortgage Association) and Freddie Mac establish guidelines that lenders follow. In addition – and especially in the current economy – lenders will often add their own guidelines as well. Lending guidelines generally include: your credit score, your income, the value of the property, and the amount of the down payment.
Credit Score
Your credit score is computed according to a computer model known as the FICO score. This model is based on your credit history.
Credit history is collected by three credit history providers: Equifax, TransUnion, and Experian. Into your credit history goes all manner of personal information such as your addresses (present and past), your phone number, Social Security number, any aliases, and your date of birth. Information from banks and credit card companies is also collected and stored in your credit history. Finally, there is also information that can be found in public records such as court filings and property records.
As you can see, the information available in your credit history can be extensive. Included will be almost every credit card and other extensions of credit – as well as loans – that you have had. For each loan, past and present, there is the amount of the loan, the payments history, and how much is currently owed.
The main point is that a credit history maintains an extensive amount of credit information. Thankfully, after seven years, the credit history providers are required by law to remove negative information upon request. This information determines your FICO score which is a critical part of what the lender will be examining. Before the mortgage loan industry got crazy in their loan criteria, a minimum score of 660 would be required to be noted as a good credit risk. Don’t be surprised because of the credit crisis to find that you need a much higher score – at least until credit markets settle out. Because of this, it is a good idea to get into the habit of working on a regular basis to improve your FICO score. To improve your FICO score, there are many websites to help you to reduce your credit card debt.
Provable Income
Next is your provable income, which is essential for the evaluation of the loan. Your income is provable by showing for the last two years your W-2s and your tax returns, as well as your last two paycheck stubs.
Presenting this information is easy for those that have been steadily employed for the past two years. The proof of income is similar for those that own their own business or that own over 25% of the business they work for. For these cases, your business income can be proved with tax returns.
The Property
A key element in the approval process is the property itself. The property you are purchasing is the collateral that is used for the loan. Consequently, the lender will assess the value of the property in case the lender must foreclose on the home. If this happened, the lender would need to sell the property, so assuring that it is worth the amount of the loan is essential.
The true value of the property is determined through an appraisal. Commonly agreed upon methods are used to find the value of a property. This is done by either a professional – either on staff with the lender, or as an independent consultant. For single family homes, the more common approach to the appraisal is to perform an analysis of similar houses in the vicinity of the property in question. The analysis consists of a comparison of attributes of the home being purchased with similar homes recently purchased in the same neighborhood. An assessment of differences between recently sold homes and the one being appraised is performed to determine the value of the home.
The Down Payment
How much is needed for the down payment is dependent on the size of the mortgage, your verifiable income, the interest rate, plus other factors. Whatever that amount may be, you will need to provide at least two months of bank statements in your loan application. This is to show that the money did not suddenly appear in your account. The lender will need to be assured that the funds for the down payment did not come from another loan. This also includes drawing a large amount from a credit card account and using the funds to deposit into your checking account.
It could be that you were given some or all of the money that you intend to use for the down payment. This is often the case, for example, with relatives helping with down payment. When this is the case, it is a simple matter of having the relatives write a letter indicating the gift and this is it for the purpose of the down payment.
Conclusion
These are the main points that will need to be addressed for you to qualify for a mortgage loan. As you can see, the bar has been raised as to who can qualify for a mortgage loan. But, with a property that is within your financial qualifications, you should be able with a little patience to get the loan that you need.
I hope you find this helpful and if you are ever looking for homes for sale in Denton, be sure to look me up.
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