Credit History - lenders
scrutinize your credit history; number of open accounts, balances
on the accounts, payment record, slow pays, collections, judgments,
tax liens, bankruptcies, previous foreclosures, defaults on
student loans, even the number of credit inquiries.
big indicator now used is your credit score (also referred to as
your FICO score), the credit agencies use a statistical model to
evaluate you as a credit candidate and the odds of your defaulting
on a loan. If you have had past credit issues, disclose this
upfront so your mortgage broker can help you.
Employment History - as a
general rule, you should be at your job 2 years. If you have
changed jobs, you should be in the same industry/field. It's okay
if you recently graduated from school and are working in
your field of study. Lenders are evaluating your stability.
For the self-employed, the lender will require at least 2 years of
self-employment, and they will average your income for the most
recent 2 years to obtain a monthly income.
Income - lenders use your
gross monthly income to evaluate your debt ratios. The debt ratios
are used to determine the maximum allowable monthly mortgage
payment. There are two ratios: The front ratio is figured by
dividing the total monthly mortgage payment by your gross income.
This ratio should be no higher than 28-30%.
back end ratio is figured by dividing the total monthly mortgage +
your monthly consumer debts (car payments, student loans, personal
loans, 401k loans, credit cards) by your gross monthly income.
This ratio should be no higher than 36-40%.
Savings, Down Payment, and Reserves
- lenders will require a paper trail of your money. "Mattress
Money", cash, and money that just shows up in your account is
not acceptable to lenders. They require a 3 month average for all
accounts, and a complete paper trail for money borrowed from
retirement or 401k for your down payment. They will not
allow you to borrow your down payment from parents, etc. it would
have to be documented as a "gift."
is important to address this issue before beginning the home
buying process! The lender will also require a minimum 2-3 months
reserves (money available to cover your expenses in the event of
loss of job, etc.). Lenders will count your retirement, IRA's, and
401k's as reserves.
Appraisal - lenders require a
written evaluation of the property's value. The lender's maximum
loan is based on the purchase price or appraisal, whichever is
Pest/Termite Report and Clearance
- most lenders will require a pest report and clearance before
funding the loan, especially on older homes. Your real
estate agent will handle this for you.
Purchase Contract - the lender
will require a completely executed purchase contract, signed by
Escrow - the lenders will
require escrow to meet lender instructions regarding the handling
of loan documents, recording, and dispersing of money.
Title Insurance - lenders will
require the security instrument (trust deed) be recorded at close,
and title insurance issued insuring the lender's interest in your
Hazard Insurance - the lender
will require escrow to pay your premium and provide proof that
your property has the proper hazard insurance, listing the lender
as a mortgagee to protect their interest.