| Qualifying for a Loan
Real estate financing is “Risk-Based”. Loan programs, interest rates and loan amounts can vary greatly between a well-qualified borrower who has a high credit score, ample assets, good employment and income, and a borrower who is less qualified in any of those areas. A borrower whose application documentation indicates a low risk for defaulting on the loan will enjoy a greater number of loan options and lower interest rates. Conversely, a borrower who is considered a high risk will have a limited number of loan options, and will have to pay higher interest rates.
The following information will give you insight into how an underwriter views your ability to repay a loan.
Your credit history carries the greatest weight in opening the doors to loan approval, and allows you access to the best interest rates and the greatest number of loan programs. A person who pays obligations on time and who has established good credit with a number of accounts over many years shows the lowest risk in taking on a new obligation. Your past payment record is shown on your credit report. A consistent pattern of late payments, liens or collections is not looked at favorably. Bankruptcies generally must be discharged for at least two years, with re-established credit and the reason for the bankruptcy fully explained. Good explanations for derogatory credit will need to be provided. In most cases, outstanding collections and judgments will need to be paid through escrow.
The underwriter looks carefully at your capacity to repay the loan. Your job stability and gross income (in relation to your expenses) are critical in this regard. Job-hopping is not looked upon favorably because it may lead to unstable income. However, if you have switched jobs within the same line of work for advancement in that field, there should be no problem. Recent college graduates who are working in the field of their degree may provide their diploma to fulfill the two year work documentation.
An underwriter requires verification of the funds stated on your application. You will need to provide proof of reserve funds, which typically are 2 to 6 months of loan payments. For a purchase loan, you will need to provide verification of the funds needed to close the loan, which includes down payment, closing costs and reserves.
The source of the funds will need to be verified, and documentation provided showing that the funds have been in your accounts for 1-3 months. If you are being given a gift of funds for the purchase, the source of those funds must be documented.
Do not make major purchases, such as a new car, when you are thinking about getting a real estate loan. Do not move money around in your accounts without first consulting with your loan officer about the best way to do it, since it may affect the underwriter’s view of your loan.
The underwriter will be concerned with the amount of debt you have because it affects your qualification and ability to repay the loan. Excessive use of credit may not be looked upon favorably.
Because the property is the lender’s collateral for the loan, the value, marketability and condition of the property are extremely important. The underwriter looks at the appraisal for this information.
This is usually called Debt-to-Income Ratio. On most types of loans you are required to meet certain “ratios” of monthly debt divided by income. There are usually two ratios, which must be met. |
