To qualify for any mortgage loan, the loan must be under written (UW) by lenders prior to approval and funding. UW covers a comprehensive and detailed review and evaluation of the borrowers financial status thus to determine the affordability that borrowers can meet their loan obligations and other debts. At the same time, lenders are very much concerned that the properties values used as a collateral for the loan, that physically are in good conditions and appraised values are within the market comparison prices.
Whether you are purchasing or refinancing a home, you must qualify for mortgage loans. Qualification is based on applicants’ credit rating (FICO score), gross income, employment, total debts including any unsettled liens, collections etc. Ultimately applicants should meet lenders qualifying ratios, referred to as Debt-to-Income ratios (DTI). Another crucial factor of loan approval is the Appraisal report. Applicants should be aware that there are other important factors taken in to consideration for approval of mortgage loans, which are not covered in this article.
The purpose of this article is to explain only the following important under writing guidelines, which are reviewed by lenders prior to loan approval:
• Credit Rating
Lenders will pull a tri merge credit report from the 3 main credit-reporting bureaus Experian, Equifax and Transunion. Each bureau assigns a credit rating named FICO score. Generally the credit ratings are divided in to two categories of “ A paper “ and “ sub-prime “. Scores exceeding 720 are rated as excellent. Scores higher than 680 are considered good rating while scores exceeding 620 would be rated not to good. Generally scores below 620 are considered poor and would be subject to sub-prime lending guidelines. For rating purpose, only the mid FICO score is considered. The highest and lowest scores are disregarded. For loans with co-applicant(s), the lowest mid score of the applicants would be considered for rating.
Bankruptcies (BK) and mortgage lates are crucial factors in loan approval. Many lenders insist that BKs should be a minimum of two or three years old since discharged date. Also any mortgage late during past 12 or 24 months, may not be allowed.
• Gross Income
Applicants can report their income as STATED or FULL DOCS (FD). The Gross income for FD is determined based on most recent pay stubs, W2 and tax returns for last 2 years. Other incomes subject to verification with a 2 years proven track such as part time jobs, rental income, interest income etc, would be considered as part of gross income.
Applicant’s main employment should be for a minimum of two years in the same profession. The 2 years would also apply to self-employed as well and to most of the other jobs/income referred to above under other income. A business license would be required for self-employed applicants.
• Total Debts
The tri merge credit reports, will disclose each applicant’s total debts and related monthly payments for credit cards, auto loans or leases, alimony, child support, student loans, other installment loans etc. Additionally, all unsettled liens, collection and derogatory accounts are disclosed by credit report.
Note: depending on description of derogatory accounts, many lenders may require settlement of unpaid liens, collections etc prior to funding of loans.
• Mortgage payments
Based on the loan amount, terms and interest rate, the monthly payments consisting of principal interest and (PI), are calculated. Additionally, the monthly property tax and hazard insurance (TI) are added to PI to determine applicants total monthly mortgage obligation referred to as PITI. Should there be any other fees such as Home Owner Association etc, such fees would be added to PITI to determine total primary housing expenses.
• Qualifying ratios (DTI)
The DTI ratios are divided in to two major parts: -
1- Primary housing expenses/income
The ratio is calculated by dividing the monthly PITI (including HOA etc), by total monthly gross income. This ratio should be in the range of 30.0 to 40.0%, preferably below 36.0%. Thus it’s assumed that 36.0% of gross monthly income would be used to service the primary housing expenses.
2- Total obligation/income
Add monthly PITI (+ HOA etc), to total monthly payments for all debts to determine the total monthly payments for all obligations. Divide this number by gross income to calculate the ratio for all obligations, which should not exceed 45.0%. Thus it’s assumed that 45.0% of gross monthly income would be used to cover both PITI as well as all other debts.
NOTE: Depending on the loan programs and other factors, the ratio for total obligation/income could be as high as 50. % of gross income.
• Appraisal reports
If you are purchasing, the appraisal must support the purchase price. If refinancing, the appraised value should support the loan-to-value. Physically, the property should be in good conditions with no defects in structural integrity, operating systems, appliance, no termite infestation etc.
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