Financing a Home in Phoenix
Determining if the borrower
qualifies for a mortgage is determined by a wide
array of different variables. These variables
often vary (and many times will vary
considerably), depending upon the type of
mortgage that the client wants or that you can
qualify for. Before saying “YES!” a lender will
look at the following items:
-
each applicants’
monthly income and expenses
-
each applicants’ credit
history
-
the property appraisal
-
source of funds for the
down payment and closing costs
-
each applicants
employment history
Monthly Income and
Expenses
The first question the
lender tends to solve for is “Can the borrower
afford the monthly payments on this new
mortgage?” To find the answer, the lender
examines your current income and expenses plus
the cost of the new mortgage and apply them to
payment ratios to see if you are within the
particular spending guidelines for that
particular loan program.
The first payment ratio is
called the “Monthly Housing Ratio” or commonly
referred to as the front-end ratio. This ratio
is the total monthly mortgage payment (PITI—principal,
interest, taxes and insurance) divided by your
total gross monthly income (i.e. before taxes).
This tells the lender exactly what percentage of
your income will be used to pay your new
mortgage.
The second payment ratio is
called the “Debt-to-Income Ratio” or commonly
referred to as the back-end ratio. This ratio is
the total monthly mortgage payment (PITI) plus
the sum of the minimum payments required on your
credit cards, charge cards, car loans, student
loans, installment loans, child support paid,
alimony paid and other credit obligations
divided by your total gross monthly income. This
tells the lender what percentage of your income
will be used toward your total credit
obligations.
It is important to also
remember that these ratios do not take into
consideration the borrowers normal living
expenses—i.e. food, utilities, gas and
automobile maintenance, entertainment, car
insurance, etc. As a rule of thumb, your monthly
housing ratio should not exceed 28-33% and your
debt-to-income ratio should not go beyond
36-38%. Sometimes exceptions can be made for a
borrower with higher than normal ratios IF you
can demonstrate your ability to carry a higher
mortgage payment (e.g. you have paid on time for
the past two years a substantially high rent
payment that is comparable to your proposed
mortgage payment).
As stated before, the
lender must know your income before he or she
can determine your ratios. For all applicants,
whether or not married, your monthly income
includes:
-
gross monthly salaries
-
commissions (using a
two year average)
-
bonuses (using a two
year average)
-
investment income (two
year average and does not include dividend
re-investment plans)
-
pension or trust income
(must be able to prove a three year
continuation in the future)
-
alimony and/or child
support (that is received not paid out each
month and be able to prove that it will
continue for at least the next three years)
It is important that the
monthly income does not include anticipated
raises or unsubstantiated estimates of future
commissions and bonuses (even though this can be
a strong compensating factor). It also does not
include investment income on accounts or assets
that will be used for your down payment.
Credit History
The second issue the lender
looks at is credit by asking the question “Have
the borrowers repaid your past debts in a timely
fashion?” The lender finds this out during the
pre-qualification process by pulling an
“in-file” credit report. Also, credit history is
established by ordering a residential mortgage
credit report (RMCR) that is submitted with the
loan package. A RMCR differs from an in-file
credit report in that it is a merged report,
pulling from a minimum of two credit
repositories, verifies accurately the current
balances and payments of all of the borrower’s
reported credit obligations and typically the
company we order the RMCR from interviews you
and verifies from you the information reported
by the credit repositories.
The payment history
reflected on the RMCR is of critical importance
for it shows how many times you were more than
30/60/90+ days late in making your required
monthly payments. It also shows your usual
payment patterns, whether you always pay on time
or are usually late. In addition, it normally
reports any judgments, liens (tax, mechanics,
etc.) bankruptcies, divorces and other public
record information.
It is vitally important for
you to disclose any known or possible credit
problems to the lender as soon as possible.
Typically the lender can work around
bankruptcies, foreclosures or other problematic
situations if properly explained and documented.
However, failure to disclose credit problems or
answer all of the related questions on the
mortgage application is a sure fire way to be
automatically denied for a loan.
Property Appraisal
The third question the
lender asks is “How much is the property worth?”
An appraisal is necessary to establish the value
of the property. This is ordered by my loan
processor after application and it not only
establishes a value on the property but reports
on: detailed information regarding the subject
property, marketability of the home and
neighborhood, obvious construction problems or
defects with the house and other factors that
affect the value of one’s home.
Source of Cash for Down
Payment and Settlement Costs
The fourth question the
lender asks is “Do you have enough money to
close the sale and where are you getting it?”
One of the steps during the verification process
is to ensure that you have enough money to close
on the home by verifying bank deposits, getting
sufficient gift letters for the down payment or
other written evidence of funds
The following is a list of acceptable sources of
funds:
-
checking and savings
accounts
-
borrowed funds (against
a secured asset—i.e. a car, CD’s, real
estate, life insurance, etc.)
-
earnest money deposit
-
gift funds (if it does
not have to repaid)
-
IRA’s and Keogh
Accounts
-
sale of assets
-
stocks, bonds, trust
accounts or other investment accounts
However, the lender
generally cannot accept the following as
acceptable sources of funds:
-
cash on hand
-
proceeds of a personal
or unsecured loan
-
a gift that must be
repaid in full or in part
-
cash advance on a
revolving charge account or unsecured line
of credit
-
cash for which the
source cannot be verified
Employment History
The final question the
lender asks is “Will your future income be
stable enough to meet the required monthly
mortgage payments?” Ideally, the lender look for
a two year history in a profession (not
necessarily with a particular employer).
Frequent job changes, spotty employment history
or unstable employment may cause us to go
through extra hoops in order to prove your
future job stability. |
