4 Tips to Understanding the Mortgage Process

The tricky piece to buying a home these days definitely lies in mortgage financing. Credit scores, income, employment history and assets are all crucial parts of the lending game which underwriters are scrutinizing more carefully in a cash strapped market place. If you are purchasing your first home, refinancing or looking to pull out some equity, take a look at these tips below to help streamline your process:

1) Credit Scores: Your credit score determines your interest rate, bottom line. Those that carry 720+ have a greater advantage at obtaining the most competitive rates. That's not to say if the score is lower you won't still save $ from your current rate. Rule of thumb is typically 1% lower interest rate and it's worth it to refinance based on cost recovery. Do the math before you commit and make sure the loan program and corresponding rate are right for you.
2) Income: With unemployment at record highs, you are fortunate if you have 2 years employment history in the same line of work. As many self-employed borrowers have encountered, the underwriter reviews "declining income" as a negative and may judge your entire picture on this item. If you have lost income or not reported as much income over the past year and it has declined, this can be a reason to decline the loan. Your best bet is to discuss this with your mortgage professional at the beginning to verify if there are compensating factors that would assist the underwriter in understanding your business financials. Such as a current P/L that reflects more income this year than last year. Higher expenses such as purchasing computer equipment or larger marketing expenses may be justified.
3) Employment History: Lenders want to see a minimum of 2 years in the same line of work. If you have gone from W-2 employee to self-employed, be prepared for lenders to request 2 years of self-employment before considering your application. Most lenders are verifying employment and obtaining your hire date to confirm eligibility.
4) Assets: Lenders typically look for 2-6 mos. in reserves depending on the loan program and the down payment. They can include your 401k or Retirement, however, they usually only use 70% of the principal balance for reserves. If any part of your down payment is gifted, they will want a letter or form completed verifying who the down payment is from and that it is truly a gift and does not need to be repaid.

Most listing agents require a pre-approval prior to submitting an offer to insure you are qualified to purchase and verify your credit scores and/or assets. There have been many a sales that have fallen out based on lending changes mid-transaction. It's good to shop lenders and when using a mortgage broker, ask who their top lenders are and if they have had any issues that may jeopardize your transaction. A good lender and/or mortgage broker will know the pitfalls and work to avoid them insuring you a smoother process.

Until next time, "No one can make you feel inferior without your consent," Eleanor Roosevelt.