The ABC’s of Preparing to Buy Your First Home

Borrowers getting ready to buy their first home are often surprised…for different reasons. I find that some are surprised to learn that they do qualify for a home in their price range and some are disappointed to learn that they have a little work to do before they can buy a home. Getting preapproved with a mortgage professional helps take some of the “surprise” out of the process.

Here are some of the bare minimum “basics” that we look for qualifying a home buyer.

Assets: If you have a 401k, retirement or stock accounts that you’re not planning on using for down payment, often times these accounts are great to have on your application to show that you have “reserves” after savings. Additional assets add financial strength to your application.

Bank statements: Be prepared to provide all pages of your bank statements (even if the last page is blank) and to document any large deposits that are on your statements. Lenders want to know where your funds came from.

Credit history: It’s ideal to have three to four lines of credit in good standing for two years or more. Your credit lines should be used once a month with less than 30% of the credit line in use for revolving debt. New credit lowers scores and old established credit that is paid on time raises credit scores.

Credit scores: Most lenders that we work with currently have a minimum credit score requirement of 640. Lenders use the lowest “middle score” of all borrowers applying for the loan.

Debt-to-income ratios: Lenders like to see your back end ratio no higher than 45%. This is calculated by dividing all of your monthly debts plus the proposed total mortgage insurance payment by your gross monthly income.

Down payment: Currently (as of the publishing of this post) FHA allows a 3.5% minimum down payment; Fannie Mae Homepath allows for 3% down; VA and USDA are still zero down payment. Conforming loans will allow for a minimum down payment of 3% with private mortgage insurance. Some programs will allow gifts from family for your down payment and/or closing cost. These funds do need to be documented and “paper-trailed” with the donor providing a written letter stating no repayment is expected.

Employment: Lenders need to see a two year job history in the same line of work. Good news if you went to school for your field, this may factor into your job history with supporting documentation (transcripts, diploma, etc.).  Gaps in employment over the past 24 months will need to be explained and second jobs are often not be factored if they have not been held for 24 months or more. 

Income: How you are paid (your pay structure) will impact what lenders can use for qualifying. Those paid an annual salary are the easiest to calculate. Borrowers who are paid hourly with hours varying will probably find their income averaged over the last two years. Self employed or commissioned borrowers will also find their net income averaged over the last two years. If a borrower receives annual bonuses, they will probably need to be received by that employer over the last two years and will be averaged.

You may have strong employment or assets and your credit is “shallow” causing you to have a lower credit score. Or perhaps you need to work on saving up for a down payment and delay buying that new car. This is why it’s important to meet with a mortgage professional as soon as possible. I often help clients who aren’t planning to buy a home for six months or even longer – they want to be prepared to put their best foot forward.

If you’re considering buying your first home, I’m happy to help you! I have been helping first time home buyers at Mortgage Master Service Corporation since April 2000 buy homes in Renton, West Seattle, Redmond, Bainbridge Island and all over Washington state, where I’m licensed to originate mortgages. If you would like me to provide you with a rate quote, click here.

Charge Offs: All is Not Forgiven

Part of what I do as a mortgage originator is review credit reports. I’m often surprised how many consumers think that a debt that has been charged off means that it has been removed from their credit history or “forgiven”. Basically, a charge off is when the creditor is writing the debt off their books for tax purposes, it is not terminating the debt owed by the borrower. Often times, the charge off may turn into a collection or be sold or assigned to a collection agency and therefore, mortgage lenders will view a charge off on a credit report as a collection.

I while ago, “Betty Bellevue” called me to see if she could help her mom obtain a mortgage. A couple years prior, her mom had a car that she “gave back” to the bank. She thought she would only have a “repo” reflected on her credit report and that enough time had passed to where she might qualify for a mortgage. What she didn’t realize is that even though the bank had the car back, she had a “charge off” for the balance of the car loan on her credit and that for purposes of a mortgage, we would treat it as a collection (it would need to be paid off and removed from the credit report).

Distressed home owners with second mortgages may be surprised to find charge offs on their credit report following a short sale. Borrowers are often caught completely off guard by this remaining damaging debt being reflected on their credit report. Depending on how the lender reports the short sale to the credit bureaus, it may be just as detrimental as a foreclosure. If you are considering a short sale or foreclosure, I strongly recommend you find an attorney who specializes in dealing with this type of situation.  Linda Ferrarri has great information on her credit blog about foreclosures and short sales which I highly recommend if you find yourself facing this situation.

A charge off also dramatically impacts credit scores. Once a charge off, or collection is paid, credit scores will initially drop as the credit scoring modules view it as a “new activity” on the borrowers credit. Eventually scores should recover and improve. If you are considering a mortgage and have charge offs or collections, it’s important to discuss how and when you’re going to pay them off (some can be paid at closing which will prevent your scores from tanking during the mortgage process).  

You can obtain a free copy of your credit report at www.annualcreditreport.com.

Washington State’s DFI (Department of Financial Institutions) guide for home owners who are considering a short sale and Foreclosure Help.

How to Prepare for the Final Phase of the Mortgage Process: Underwriting

You’ve completed a loan application and have provided your mortgage originator with your income and asset documents. You’re told your loan is being submitted to “underwriting”. During the stage, the information you’ve provided is being scrutinized by a person (the underwriter) to make sure that it meets your specific program guidelines and the investor/lender guidelines. 

Hopefully your mortgage originator has done a solid job with your application by addressing possible questions the underwriter may have and gathering supporting documentation. Even if your mortgage originator and you have prepared the perfect loan ap for the underwriter, additional items are often called for after the underwriters review. These additional items are referred to as “conditions” to the loan approval. 

Here are a few quick tips to help make this process a little smoother.

  • Save everything. If you’re a shredder, like me, it’s time to stop… at least until after your loan has funded. Keep your paystubs, bank statements, retirement and asset accounts – you will probably have to continue to provide updated information to the lender.
  • Be prepared to document where large deposits ($1000 or more) came from on your statements. This means providing deposit slips and/or copies of the cancelled checks.
  • Provide “all pages” of items requested unless otherwise instructed. If an underwriter sees that your bank statement shows 1 to 4 pages, and you’re missing the last page (even if it’s blank), you will be required to provide this. “All pages” also needs to be provided of your tax returns, divorce decrees, child support orders and other documentation if requested by the underwriter. Just providing pages you feel are purtinent may delay your loan approval.
  • Avoid moving funds around. You will need to show where the funds came from and just saying “can’t you see I have gazillions in this account” won’t cut it with the underwriter.
  • Do not apply for credit. This creates an “inquiry” on your credit report. Your credit report is checked prior to closing and, if you have a new inquiry on your credit report, you will have the opportunity of explaining this to the underwriter. If you do obtain new credit, your loan will need to be re-underwritten with the new debt — even if there is no payment due (such as 60 days same as cash, etc.)
  • Provide requested documents promptly
  • If you’re planning a vacation, let your mortgage originator know as soon as possible.

Quickly providing everything that is being requested will help avoid delays with the mortgage process. 

In my opinion, a professional Mortgage Originator will essentially “pre-underwrite”  you as they take your application. They know what questions to ask and what documentation to provide the underwriter.  This is much better than working with a mortgage originator who has little to no experience in closing transactions, which you will probably find at large banks or large internet lenders.

If you’re interested in getting preapproved for a mortgage on a home located anywhere in Washington, I’m happy to help you!

Is My Credit Checked Before Closing

A “soft” credit check is just prior to closing on your mortgage.  This is to ensure that no new debt was obtained during the mortgage process and that the information on your final application that you sign at closing still represents your financial scenario.

A soft credit check does not impact your credit scores. It will disclose any new debts and credit inquiries.  If there are changes to your credit revealed from the soft credit check, be prepared to explain and document whether or not new credit was obtained. Even if the credit card you decided to open during the transaction has not been used, you will still need to provide documentation regarding this new potential debt.

A “hard” credit check may take place if your existing credit report is set to expire before closing. Different than a soft credit check, the mortgage company will order a new credit report and the terms of your mortgage will be impacted by what the new report discloses, including any changes to your credit scores. This includes your current pricing of the loan and qualifying. 

It’s really best to not obtain any new credit during the mortgage process and avoid applying or inquiring for any credit. Even when the creditor states “six months same as cash” or “this won’t impact your credit” – don’t buy it!  If you do feel you need to make a purchase just prior or during the mortgage process, please discuss it with your mortgage professional first. A new car or big screen tv for your home may delay the purchase of your new home. 

Explaining the “Letter of Explanation”

preapprovalIt’s not unusual these days to have a lender request a “letter of explanation” from a home buyer or someone who is refinancing their current property.  I letter of explanation (or LOE) is often used to help provide more information to the underwriter or lender based on information that is disclosed on an application or credit report. LOE’s may address anything from gaps in employment to inquires on a credit report and is intended to help explain or add support to the transaction. If a borrower has had an extenuating circumstance and is trying to have an exception made to an underwriting guideline, they may be asked to write a LOE.

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How Disputes on Your Credit Report May Impact Obtaining a Mortgage

Reviewing your credit report and disputing information that is being wrongly reported about you is your right under the Fair Credit Reporting Act. Obtaining your credit report and making sure that it’s accurate is financially responsible and your duty to protect your credit. And the Federal Trade Commission provides you tips on how to dispute items on your credit report.  Did you know that lenders may not accept a credit report where it indicates there is a disputed item? 

It doesn’t matter if you have perfect credit or a low loan to value, Fannie Mae and Freddie Mac guidelines are forcing lenders to provide a credit report without disputes. I’ve recently had transactions where the borrower doesn’t recall disputing anything and the debtor doesn’t have record of the dispute yet this “dispute” needs to be removed from the credit report or the lender/bank will not accept the loan. This is one reason why anyone considering a mortgage for refinancing or purchasing a home should obtain a copy of their credit report very early on. It can take a great deal of time to have disputes removed if a borrower does this on their own.  

The other option is for a “rapid rescore” which whittles down the process to days. The irony in this is that rapid rescore is not free and it is the credit bureaus and reporting agencies who profit when this service is done – I really have a problem with this when my client and the creditor state there are no disputes of record yet somebody has to pay to have these items quickly removed to accommodate a closing date. Often times, the lender absorbs the cost of the rapid rescore however this eventually drives up the overall cost of doing business and eventually, the consumer pays.

In my opinion, this is something that Fannie Mae and Freddie Mac need to change pronto. Well qualified borrowers should not have to go through these hoops or have their mortgage denied. A simple written letter of explanation signed by the borrowers and possibly the creditor *should* suffice instead of requiring the credit report not show any sign of a dispute. Apparently back in 2009, Fannie was reviewing their policy however, I’m not aware of any significant changes.  

If our government wants to help the housing industry and our economy, this practice needs to stop now.

Shallow Credit can leave you in the Deep End when Qualifying for a Mortgage

Shallowcredit When in comes to qualifying for a mortgage, lenders are generally looking for borrowers who have established a history of paying their obligations on time. Ideally this would consist of four accounts that have been open and used for the last one to two years.  When someone does not have active accounts, or when their accounts are all new, their credit history appears “shallow” to some lenders.

You don’t have to be a first time home buyer to have “shallow credit”. 

Recently I helped a couple in Bellevue who were buying a “move-up” home using a jumbo loan for financing. They had excellent credit, plenty of savings and liked to pay cash instead using credit. When they did use credit, they would payoff and close the account immediately. You could see they had a credit history, they even had stellar credit scores, but they lacked having active trade-lines. One lender that we worked with actually declined the loan. Luckily we have several resources for non-conforming mortgages and we closed on the transaction after we switched to a different lender with less rigid guidelines.

Credit scores are impacted more dramatically for borrowers with “shallow credit” over those with established credit.

Because the borrower has less of a credit history to illustrate their borrowing and repayment patterns, their credit scores tend to be more sensitive to situations than a person with a long established good credit history. Don’t get me wrong, an established credit user with great scores will suffer a ding if they make a late payment or open a new debt, however it tends not to be as damaging as it is for someone with a lighter history.  

What can you do to improve your credit history? Here are some tips for if you are considering getting a mortgage:

  • Pay your debts on time. NOTE: paying off and closing an account where you have made a late payment will not erase the damage from the late payment…in fact, it might hurt your score more if that account was established…
  • Do not close established credit accounts. Credit bureaus LOVE established credit history. If you have an older account, you may want to consider using it to buy a tank of gas or groceries and pay it off each month. If the account is not kept active, it will eventually be treated as a closed account and you will no longer receive points for that positive history.
  • Do not obtain new debt. New cars and credit cards will drop your score.  Not only is it a new debt “ding”, you’re also getting dinged for having a debt at 100% of it’s credit line.
  • Keep your debts below 50% of the credit limit (30% is even better).  For example, if you have a credit card that has a credit line of $1,000; try to keep your balance below $500 or 50% of that credit line. 
  • WAIT to pay off collections. Sadly the scoring system factors this as new activity (kind of like getting a new collection) against your score. Often times it may be best to pay off the collection at closing if needed. Your Licensed Mortgage Professional can help you determine this.

Other tidbits about credit scoring…

  • Size doesn’t matter with credit scoring. Paying down a smaller credit card has the same impact as paying down a larger one. (I recommend starting with the accounts that will take the least amount of funds to pay down). And a $70 collection hurts your score just as much as a $700 or $7000 collection.  
  • Charge-offs hurt. Many borrowers believe that because the creditor has written off a debt, they’re in the clear when they actually still owe on the debt. When a charge-off is reported to the credit bureau, they are viewed (and scored) as a collection.  

If you are planning on buying a home in the next year or refinancing, it doesn’t hurt to start very early with a mortgage professional who can help you review your credit and provide advice to help you be in the best position possible.  It’s more important than ever with tighter underwriting guidelines and mortgage rates that are based on credit scores.  I often meet people who have tried to fix their own credit, believing they’re doing what any normal person would believe are the right things (like paying off debt and closing accounts) only to discover they’re scores have tanked. It takes time to repair or establish good credit.

If you, or someone you know, is considering buying or refinancing a home anywhere in Washington, I’m happy to help!

5 Ways to Derail Your Loan Approval

MonorailYou’re getting ready to buy a home or refinance your home with your closing day around the corner when your mortgage originator contacts you to let you know there may be a problem.  Some issues may not revealed until days or sometimes weeks into a transaction.  Anytime documentation is provided to the mortgage company, it has the potential to raise more questions or require more documentation to satisfy underwriting guidelines.   Here are five situations to be aware of that can cause headaches during the loan process.

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