Let's face it; the thought of applying for a mortgage these days makes a lot of people want to curl up into a ball and hide. Mortgages involve a lot of paperwork, a lot of questions, and, often, a lot of anxiety for a would-be buyer. So, let's pull back the curtain and make this seemingly arduous process a little more straighforward. Adam Dahill, Mortgage Loan Originator with Mortgage Master in NYC, gives us the inside scoop on what lenders are really looking for when deciding whether or not potential buyers are worthy of a mortgage and gives some tips on how to streamline the process.
What paperwork/numbers should a potential buyer have ready for their initial conversation with a mortgage professional?
It depends on how you derive your income. I ask all clients for the past two years federal tax returns, including all W2’s, 1099’s, K1’s, etc. If you have a K1 that shows more than 25% ownership in a business, I will request the past two years business returns, as well. I also need two months of the most recent asset statements (all pages), most recent two months paystubs, and photo ID.
What are the main things a lender looks for when deciding whether or not to approve a perspective buyer for a mortgage?
Due to the Qualified Mortgage Act, lenders are mainly concerned with the ability to repay. Debt to Income Ratios are the most important factor when pre-approving a client. Having a good credit score is a perquisite, but it won’t get you a mortgage if you can’t document your income. In the Jumbo arena, strong post closing assets and liquidity come into play more, and exact requirements vary from lender to lender. Be prepared to have six months worth of [mortgage and maintenance] payments at a minimum for post closing reserves. Some lenders require 12 months and others require a percentage of the loan amount borrowed.
What’s the minimum credit score banks want to see these days? If a perspective purchaser’s score is low, is there anything they can do?
Some lenders don’t have credit score requirements, but I would say 620 at the bare minimum is the bottom number needed to qualify for smaller loan amounts. When you get into the higher Jumbo loan sizes, 700 is the standard but rates can vary wildly depending on the lender and program. There is almost always an option but it may come from either a higher rate or greater down payment.
What about income and liquidity? If a perspective buyer has low income but high liquidity or vice versa, can one balance out the other?
The magic number for non Fannie Mae/Freddie Mac/FHA is a 43% monthly debt to income ratio. If a borrower has substantial assets, there are a few asset based programs. The theory is that great assets could pay interest and dividends which can be used to pay the monthly debt obligations.
How does rental income from investment property come into play?
It depends if it’s a purchase or refinance transaction. In many situations lenders can give you 75% of the market rent on a property delivered vacant. FHA loans can grant you 85% of the rents from the other units if you are buying a 2-4 unit home. If a client already has rental properties, lenders will review the previous two years Schedule E of the borrower’s tax returns to determine the cash flow on the rental properties they own. Depreciation and certain documented repairs can be excluded from the property expenses.
If a person is thinking of buying real estate in the next 6 months to a year, what can they do NOW to improve their chances of obtaining financing and make the process as smooth as possible?
I suggest getting pre-approved now and, specifically, have your credit checked to make sure there isn’t any erroneous information. Save money, don’t go on vacation or buy a car, don’t change jobs without speaking to your mortgage professional. And NEVER switch from W2 to Self Employed 1099. The other way around is OK.