May 2nd, 2014 9:27 AM by Jackie A. Graves, President
To some potential buyers, particularly first-time buyers,
the prospect of meeting a mortgage lender may seem a little scary. Lenders ask
a lot of questions because they want to help you get a mortgage. If you work
with a lender before you decide on a home, you will know whether you’ll qualify
for a mortgage large enough to finance the home you want.
It may seem that your lender needs
to know everything about you for the application, but actually all the lender
needs to know about is employment, finances and information about the home
you’re buying (but you can be pre-approved before you choose a home). You will,
however, need to provide quite a few details about these topics. The goal is to
arrive at a monthly payment you can afford without creating financial
hardships. Here's an idea of what lenders consider when they are qualifying you
for a loan:
Your household income and expenses
Lenders look at your income in ways other than the total
amount; how you earn it is also important. For example, income from bonuses,
commissions and overtime can vary from year to year. If these sources make up a
large percentage of your income, your lender will want to know how reliable
Your lender will also consider the
relationship between your income and expenses. Generally, your fixed housing
expenses (mortgage payment, insurance and property taxes, but not repairs or
maintenance) should not be more than 28 percent of your gross monthly income,
although this is not an absolute rule. Your lender will also consider other
long-term debts, such as car loans or college loans. It is a good idea to bring
the following when you meet with your lender:
Job stability is a factor that a mortgage lender will look for, and two years
at your current job helps, but this also is not an absolute requirement. If you
change jobs but stay in the same line of work, you should not have a problem —
especially if the job change is an advancement or increase in income.
Your credit score also helps
to predict how likely you are to repay the mortgage debt.
The lender does the best possible job of ensuring that a
borrower qualifies for a loan. The final decision, however, rests with the
lender's underwriter, who measures the total risk that the specific investor,
who backs up the loan, is taking. Each investor (or investment company) has its
own underwriting guidelines (often using statistical models), so while the
underwriters evaluate many of the same factors as the lenders, they may look more
closely at some areas than others, depending on the guidelines. For example,
while the lender may have pre-approved you before you chose a home, by the time
you get to underwriting, you will have chosen the property you want to buy, and
the underwriter will review the property details closely.
However, most of the information
used is the same as that used by the lender, but it may be evaluated
differently. The underwriter will evaluate the borrower's ability to pay
(income), willingness to pay (credit history), and the collateral (property).
As underwriters analyze each of these risks (although this is not a complete
list), here are some possible guidelines they may use:
Is the property worth what the borrower is paying for it? If not, the lender
will not loan an amount in excess of the value. If the appraisal comes back
less than the offer on the house, sometimes you can renegotiate the terms of
the purchase contract with the seller and his/her real estate agent.
Some borrowers agree to purchase the
home at the price they originally offer and pay the difference between the loan
and the sales price. You need to have disposable cash to do this, and you
should assess whether the property is likely to hold its value. You also need
to consider the type of loan for which you have qualified. If you need to move
suddenly and have a large loan relative to the original value, and the property
has not held its value, you could face a difficult cash shortfall when you go
to pay off your loan.
Is the property an acceptable type
of property, and does it meet coding requirements and zoning restrictions? Is
the property comparable to other properties in the area? Surveys are common and
are used to get an accurate measurement of the land that goes with the property
you are purchasing. The person who prepares the survey should be a licensed
land surveyor. The survey shows the location of the land, dimensions of the
land and any improvements.
Encroachments are improvements to
property that illegally violate another's property or their right to use the
property, such as building a fence that is actually on your neighbor's property
instead of yours, or constructing a building that crosses from your property to
another’s property without their permission. Evidence of encroachments can slow
the final approval process.
A downpayment is a percentage of your home's value. The type
of mortgage you choose determines the downpayment you will need. It can range
from zero to 20 percent, or more if you wish.
A number of loans are available that
do not require high downpayments, particularly for first-time home buyers. FHA
loans, for example, may require less than 5 percent down, and veterans or those
on active duty in the military can obtain loans with no downpayment at all. In
addition to downpayment assistance, these programs may have less strict
guidelines for loan approval, such as allowing a higher ratio of payment to
income or debt to income. They also may accept alternative forms of credit
history if you have not established credit through traditional means — credit
cards and car loans. For example, a lender could look at the history of utility
payments and rent payments to determine credit worthiness.
Several state and federal programs
provide downpayment assistance but may have income and other guidelines. See Special Programs.
For more information on qualifying
for a loan, see How Do You Buy a Home? Step 5: Submit the Application.