Qualifying for a Mortgage Loan
Understanding the real basics in qualifying for the mortgage loan is very important. Many advertisements are misleading eye-catchers. Trash interest rate headlines, which 99% of the world cannot qualify for.
You heard it before, many times – “if it’s too good to be true, chances are it’s not good.”
Let’s keep it simple and break this down.
- Credit and credit score
- Down payment and funds for closing cost
- Debt to income ratio
There are many underwriting factors that are required but once these basics are covered most often the rest is just routine.
Credit and credit score:
This is generally the big question I start with, “How’s your credit?”
The most common answer “Oh it’s good.” Well let’s talk about what is good in today’s mortgage world.
A 550 to 580 credit score is just-urhg! It is not as low as you could go, but you only have about a 5% chance of getting your loan through underwriting. Our office currently does not handle loans in this category.
580 to 620 is Okay, we can work with this, but this is going to be a tough loan. You will only have about a 65% chance of getting your loan through underwriting, because of your low credit score.
620 to 640 credit score, this section is slightly better, with a few less conditions; but still with some high levels of stress through the process.
640 to 720 is a good credit score to work with. A medium amount of stress, some uncertainty, and about 85% chance of getting your loan through.
A credit score 720 to 780 is really nice to work with. This level experiences some irritation with the process, generally based on multiple requests for additional documents.
Credit Scores over 780 are outstanding. However, these clients tend to create their own stress by believing that their credit score alone is good enough to get them through underwriting. At this level, you still have to verify everything in detail in the same way as everybody else regardless of credit worthiness.
There is no credit score alone that guarantees you a mortgage loan.
Now even with the above, you still may have credit issues. I have worked with many clients with credit scores in the mid 700’s, yet these people have had what we call, a ‘past housing event’. A past housing event may have been a short sale, deed-in-lieu, or a foreclosure. These are critical events and although they may not be deal breakers, you may end up with only being able to qualify for a loan program that you just don’t like.
Other credit events that impact us without us knowing or understanding why.
Many people who have items that have been put into collects such as; a car repo’, utility bills, deficiency from a short sale. Once these things happen, many people then challenge them on their credit reports. These challenges or disputed items are then blocked off from your actual credit score and hence showing a higher score giving you the consumer a false reading. When applying for your home mortgage loan, these disputes need to be removed. When this happens your credit score will almost always drop significantly. Sometimes disqualifying your ability to get a loan.
Down Payment and Funds for Closing Cost:
The down payment and closing is the most misunderstood part the mortgage loan and buying process. This part is responsible for the two major regulations in the industry, TILA and RESPA (TRID).
Each type of loan program has a minimum down payment requirement except, USDA and VA loans.
FHA requires a 3.5% minimum contribution and Conventional loans 3% minimum standard requirement.
USDA, VA, and FHA have funding fee requirements, these fees are added on top of your loan. The VA has exceptions for disabled veterans.
Closing costs vary from lender to lender, title company to title company, and from state to state. Your closing cost may include, but is not limited to- title insurance, a handful of different taxes, surveys, appraisals, credit report fees, underwriting fees, processing fees, flood certificate fees, verification of employment, the proration of taxes, insurance, and homeowner’s association fees. The list is long and the amounts vary widely with many different types of scenarios based on the type of property, location, price of the home, and the amount of the loan.