Basic Qualifying Standards If you would like more specific information about qualifying for a loan you will find in-depth guidelines on our Lending Partner's websites or better yet, call them for a full EVALUATION of your situation. It's the next best thing to a full loan approval!   CONTENTS: Financial Ratios are less than half the story The 3 categories of loans Basic qualifying guidelines

I am sorry to have to tell you there is no way to look at your income and debts and tell how much house you can afford. A loan approval is much more complicated than meeting certain ratios of debts to income.

 

IN OTHER WORDS, FINANCIAL RATIOS ARE LESS THAN HALF OF THE QUALIFYING PROCESS!

 

Stability factors such as address history, job history, income and credit have more to do with the loan type and amount a person can be approved for than anything else!

Before we can get into Basic Qualifying Guidelines we need to make you aware that there are several types of loans and they all have different qualifying guidelines. One size definitely DOES NOT fit all! You will first need to discover where you fit to be able to find out which Qualifying Guidelines apply to you.

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There are 3 basic categories of loan types: A, A-, & B
Each type has their own qualifying guidelines, loan programs & interest rate structures.

 

A loans are the best loans with the best interest rates. Most people fit in this category.

• Qualifying guidelines are national standards and do not vary from lender to lender.

 

A- loans are a small, but growing, sub-category of A loans. In the last few years FHA loans have become mostly A- loans.

A- loans have more liberal qualifying guidelines and allow lower Credit Scores, but usually have slightly higher interest rates.

Some Conventional A- loans reduce your interest rate after you have proven yourself by making 12 on-time payments in a row.

• Qualifying guidelines are national standards and do not vary from lender to lender, but they do vary from loan type to loan type.

 

B loans, also known as Subprime loans, have the most liberal qualifying guidelines, but also have the highest interest rates and can have the most "unusual" terms. This means you must be very careful to read ALL the fine print when you get a B loan. B loans have none of the safeguards you take for granted in A loans.

There is a B loan for almost every situation from

a) you just barely didn't qualify for an A loan to

b) your Bankruptcy was discharged yesterday.

But remember, the higher the risk, the higher the rate!

B loans usually have 3-5 year prepayment penalties. Most will allow you to "buy out" the prepayment penalty by paying extra points or taking an even higher interest rate.

Beware of interest rate increases and Negative Amortization (where your loan balance INCREASES as you make your payments instead of decreasing). Many B loans will start you at an attractive rate that disappears 3-6 months or a year into the loan.

B lenders promote Adjustable Rate Mortgages because they make more money. Be very, very cautious about WHEN, HOW MUCH and HOW OFTEN the rates can rise, and more importantly, what Base Rate is used to calculate maximum interest rates. You will think it it based off your start rate, but it will usually be based off a much higher rate so your interest rate will be able to rise much faster and further than you think.

• Qualifying guidelines VARY SIGNIFICANTLY from loan type to loan type and from lender to lender.

Just be sure to make a careful scrutiny of ALL terms, not just the major terms like interest rates.

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BASIC QUALIFYING GUIDELINES
Although A, A- & B loans all have different qualifying guidelines there are some commonalties:

An Underwriter's idea of stability is no more than 2 jobs or addresses in a 2 year period. If you have recently changed jobs, ideally the new job will be in the same field and you will be out of your probationary period.

You should have enough money in the bank to cover all monies needed to close PLUS at least 2 months payments in reserve (some loans require more than 2 months reserves).

An Underwriter is paid to be negative and presume last minute cash is a gift, borrowed or drug money - all of which weakens your qualifying position. This means you will need to furnish a paper trail of any last minute cash. In an ideal world the money would have been in the bank long enough that it would show on the last month's bank statement or would reflect in the 2 month average balance on the verif the lender gets from the bank.

If you own rental property you will get to count 75% - 80% of the income but will have to count 100% of the debt. Which means that if the rent income is the same amount as your mortgage payment you will have a negative cash flow (which is the same thing as an additional debt).

A checking account is required on most loan types because Lenders have found out the hard way, that people without checking accounts do not pay their house payments in as timely a fashion as those with a checking account.

Cash on Hand, otherwise known as Mattress money, can be a great issue. How can you prove the money is yours and wasn't borrowed, a gift or drug money? Some loan types allow mattress money, but most require a paper trail.

HOW you are paid can be more important than HOW MUCH you are paid. An Underwriter is looking for the consistent income stream available to pay this consistent new house payment. This means commissions, bonuses & overtime pay may not be able to be fully counted without a history. 2nd or part time jobs need a minimum of 1 year history. Check with one of our Lending Partners to see about your particular situation.

 

CONVENTIONAL LOANS - Lenders do not have to count any debts that last less than 10 months.

FHA LOANS - Lenders do not have to count any debts that last less than 12 months UNLESS the payment is $125 or more.

Credit cards paid off monthly still have be to counted against you unless the credit bureau shows a zero balance. Why? First, the monthly cash flow affects your ability to repay the mortgage payment and secondly, since you are not required to pay them off each month, it is conceivable that you will quit paying them off sometime in the next 30 years while the mortgage payment is in effect and that will affect the money you have available to make the house payment. Although you may not like it, it should be obvious that incurring any type of debt will affect your ability to make the payments on your other debts.

Paying off or paying down a debt usually has more of a positive impact upon your ability to qualify than an increase in salary.

Late payments on a car, house payment or rent have more of a negative impact than almost anything else.

If you've had a bankruptcy the Underwriter would like to see signs that you have recovered both mentally and financially. They would like to see at least one new account opened since the bankruptcy (not carried thru the bankruptcy). Money in the bank along with address and job stability are more important than normal. You do not want to have had any bad credit since the bankruptcy.

Loans against your 401k or other retirement account might couns as a debt against you even though you are paying the money back to yourself. A straight withdrawal does not count as a debt.

Because it doesn't take into consideration all of the elements an Underwriter will look at when it is time to approve (or turndown) your loan, an Agent or Mortgage company PQ will not tell you how much home you can afford. You will need a full EVALUATION of your situation or a PreApproval. (See also Evaluation vs. PreQualification)