Qualification Basics

With the rise in interest rates, everyone who has not refinanced, along with those contemplating buying a home, are now diving in to make sure they don’t miss the last opportunity on record low mortgage rates.

I want to take the opportunity this week to give a quick overview of the qualification process. Because especially in today’s economic world affected by the covid, it is important for you to understand how we in lending will evaluate your application.

Your application is broken down into 4 distinct categories.

This is probably the easiest of the 4 categories for a consumer to understand. Your score is the driving factor into the rate you will get. The other 3 categories must meet lender guidelines, but only the credit score is the category of the 4 that directly impacts your rate and terms.

When we pull your credit report, we get a score from each of the 3 credit repositories, Equifax, Experian, and Trans Union. We must receive all 3 scores because we throw out the high and the low and use the middle score. If there are multiple borrowers, we use the same procedure for each. Then comparing the middle scores of every borrower, we use the lowest of all those scores. That’s the determining credit score used for the application.

Generally, you cannot manipulate your credit profile to gain a higher score once the application has been submitted for consideration. The only exception is if there is inaccurate information on the report. Lenders will allow corrections for errors. If that correction results in a higher score, you will be able to utilize that higher score.

Income is very straight forward. You either have sufficient income or you don’t. The complicated part, especially during these times of the pandemic, is what we use to determine your income.

If you’re an employee and are currently laid off, unfortunately, unemployment is not counted – nor are any of the other pandemic relief payments. For those that return to work, all you need is a full month of your regular pay to have your income counted like nothing ever happened.

Self-employed borrowers have the greatest barriers to climb over. Not only will you supply the most recent 2 years of personal and business tax returns, but lenders require current Profit & Loss statements and 2-3 months of business bank statements. If your business suffered losses more than 23% from your previous year, even if you qualify, many lenders won’t approve your loan. The deem your business to be on shaky ground and could fold. Hawaii own Love’s Bread just announced they were closing after 156 years. They suffered a 20% decline in business. For those entrepreneurs that profited during the pandemic, you’ll need to get those 2020 tax returns done in order to have that new income count.

Your transaction will most likely require you to bring funds it at closing. All funds have to come from sources that are verified. Forget using the money under the bed, as any funds not properly documented don’t exist in the eyes of the lender.

As straightforward as this seems, I witness the greatest frustration from borrowers because of assets. The most common “mistake” is moving funds around. Every time you move money from one account to another, we have to document where the money came from and where it ended up. That means getting 2 months of bank statements from the sending account and the receiving account. If you move money from multiple accounts, you can see how this could easily snowball.

Here’s a simple suggestion. Unless you are receiving gift funds, either move all your anticipated funds into one account at least 60 days before applying for your loan, or don’t move any of the money until your lender instructs you to do so.

The Property:
Lenders review very few things about the property. Obviously, they look at the appraised value to make sure you have the required equity for your transaction. They also look at the appraiser’s notes if there are any issues with the condition of the structure. After all, if you bought a home with a roof needing repair, that financial burden could cause you to miss your mortgage payment. Or worse, you ignore it, and the collateral the lender gave you money to buy starts to decay due to poor upkeep. They also review the appraisal report for notes of health or safety issues. I’ve seen too many pictures of homes with leaky pipes and black mold problems. Also, here in Hawaii we are famous for our outside lanai areas. But when those boards rot and the nails are no longer holding the floor or railings tight, that’s a safety concern that will derail your loan.

What most people fail to understand is that strength in one aspect of your application generally cannot make up for a weakness in another.

I have had too many conversations that start with “I have an 800 credit score, but let me tell you about the issues with my income…”

You can have excellent credit, more than sufficient funds in the bank, and have a home in excellent condition, but with out income, you are not going to get approved.

If you have great income, the money required in the bank, and a perfect property, but your credit is in the tank, you will not get approved for your loan.

Let’s say you have excellent credit, a great job with verified income, wish to purchase a wonderful home in like-new condition, but the source of your money has been cash kept in a safe, you’ll be shocked to learn you won’t get financing either.

And if you haven’t already guessed the last iteration, let’s say you have an “800” credit score, tons of income, seasoned verified funds in the bank, but the property is in horrible condition, your loan will also get denied.

It is important to recognize that each of the 4 categories that make up your mortgage application play important non-connected parts to the whole picture of your loan request. I could go deeper into each of the 4 categories, but after reading this you’ll know enough of the basic knowledge that will allow you to self-evaluate yourself. Then use that knowledge when speaking to a Mortgage Originator about your individual specific mortgage needs.