I also provide lending through our sister company Discovery Mortgage. Frequently people want me to tell them what type of loan I can procure for them. They proceed to share with me their credit score taken from another source. Well it is not that easy. I want to cover a few of the factors that go into a loan and provide you with things to consider as you prepare for your next loan.
Credit Score: The Credit Score on a home is figured differently than loans for other purposes. It is also constantly changing. Rarely does anyone have the score they think they have. Multiple Credit Checks in a 30 day period all for the purpose of obtaining a home loan does not negatively impact your credit score.
Credit History: You may have an excellent score, but lenders also want to see credit lines that have been open at certain levels for certain periods of time. For example a lender may want to see three credit lines open for 24 months, one with a high credit limit of $5,000.00. Without this requirement they don’t care how good your score is.
Debt to Income (DTI): Lenders will only make loans that will allow so much of your income to go to debt payment, including the loan they are making to you. For example: If your credit report shows you are currently making payments totaling $500.00 per month and your new home purchase (including tax and insurance) will cost you $3,500.00 a month you have a monthly debt payment of $4,000.00. If the lender has a 50% DTI requirement you need to have earnings of $8,000.00 per month.
Loan to Value (LTV): Lenders want to see equity in a home. The more equity a borrower has in the home, the better chance of getting a loan and the better rate the borrower can get. There are some lenders that do loan 100% or more LTV, this is at much higher rates. The most frequent 100% financing involves 2 loans, one at 80% of the value of the loan and another loan at a much higher rate for the 20% balance.
Cash Out: When a home is refinanced and the borrower takes cash out, usually the rate is a little higher. If the borrower just pulls enough out for their refinancing cost (closing, appraisals, etc.) this is usually not viewed as a cash out loan.
Verification of Rent: When a buyer of a home has rented before the lender will want to see verification of timely rent payments. Usually a letter from the landlord will suffice; some lenders will want to see the checks.
Mortgage Lates, Default, Foreclosure, and Bankruptcy: Any one of these factors can make it harder to obtain a loan. (However, not impossible, I have qualified buyer for 100% financing just out of Bankruptcy.) The further in the past the issue is the less important it is.
Reserves: Many lenders will want the borrower to have reserves. Basically, enough cash to pay the mortgage in the bank, a pension plan, or some other liquid form that can make the payments for 2 to 3 months.
Full Doc., Stated Doc, & No Doc.: There are lending requirements as how a borrower documents income. A “Full Doc.” loan is usually verified with w-2’s bank statements, or tax returns. “Stated Doc.” loans usually involve only a verification of employment with no income documentation required, although the income stated needs to be reasonably possible for the job. A “No Doc.” loan generally requires no documentation of income and sometimes even no claim of income. Each lender varies in regard to these requirements. Generally speaking more documentation results in lower interest rates.
There are many other issues to consider, closing cost, escrow accounts for taxes and insurance, appraisal issues, etc. . . .
In the competitive free market environment there are many choices and many lenders with different requirements and standards. The job of a mortgage broker is to help you sort through the choices to find the best loan for you.