Five Building Blocks of a Mortgage

 

 

 

1.      The Property

The objective of the appraisal process is to judge the property’s value as security for the mortgage loan.  It is the role of the appraiser to provide an estimate of the value, as well as a complete and accurate description of the property at the time of the inspection.  The “appraised value” estimate is the appraisers “professional conclusion” and is based on the market data, logical analysis, and professional judgment.  Aspects of values such as location, neighborhood, zoning, and the age of the home, are applied to the property.  The extent of improvements is also included in the determination of the value.  The greatest emphasis in determining the value of a property is generally placed on the “Market Approach”, or better known as the comparable system.  This system entails comparing the subject property to a series of similar properties.   The values are then adjusted for teach comparison property and then given a final value.  Comparables must meet the following requirements to be used:  Property must be both sold and closed, location must be within a one and a half mile radius, the sale should be less than six months old, and the similar type home.

 

2.      Available Cash

The borrower must have sufficient verifiable funds for all the costs you will incur in the purchase of your new home.  These include down payment, closing costs, prepaid items and reserve of cash.  These funds may not have to be on your own, depending upon the loan program you select. Typical forms of liquid assets are:  Earnest money, checking and saving accounts, money market accounts, stocks and bonds, equity from an existing home, bridge loans or secondary financing. 

 

3.      Income and Employment History

The borrowers must demonstrate stable employment and income.  Two years employment history on a job or in an occupation is required in most cases.  There are exceptions to this rule and are evaluated on a case-by-case basis.  The most common exception is attending school or being enrolled in the military.  Things that will influence underwriters will include:  Probability of employment, potential for growth and advancement, and income growth.  For bonuses or overtime to be used in qualifying, you must show a two year history of the bonus income.   Types of income able to be used:  full and part time income, social security income, rental income, retirement income, alimony and child support.  Self-employment borrowers need two years of audited tax returns.  Typically, a lender will use the income that is shown on the bottom of the front page of your return called net income.  There are loan programs available for self-employed borrowers, if their credit scores are high, in which no returns are needed.

 

 

 

 

4.      Credit Score

FICO Scores: Understanding the crossroads that lead to explaining the score

 

What makes up the score?

ü      35% = based on payment history (i.e. on-time pays or delinquencies); more weight current pay history

ü      30% = capacity (capacity is the King)

ü      15% = length of credit

ü      10% = accumulation of debt in the last 12-18 months (number of inquires and opening dates

ü      10% = mix of credit

 

What actions will hurt the score?

ü      Missing payments

ü      Credit cards at capacity

ü      Closing credit cards out

ü      Shopping for credit excessively

ü      Opening numerous trades in a short time period

ü      Having more revolving loans in relation to installment loans

ü      Borrowing from finance companies

 

What doesn’t affect the score?

ü      Debt ratio

ü      Income

ü      Length of residence

ü      Length of employment

 

Approximate Credit Weight for each year

ü      40% = current to 12 months

ü      30% = 13-24 months

ü      20% = 25-36 months

ü      10% = 37+ months

 

How to improve the score?

ü      Pay down on credit cards

ü      Do not close credit cards because capacity will decrease

ü      Continue to make payments on time

ü      Slow down on opening new accounts

ü      Acquire a solid credit history with years of experience

ü      Moving revolving debt to installment debt

 

 

 

5.      Credit History

 

The borrowers credit is a very important part in the loan process.  In general, successful handling of past obligations is expected.  On time payments with very few late payments will be critical to a loan being approved.  Mortgage payments or rental payments are most important.  Since these are considered major obligations to a potential borrower, any adverse information that shows up on a credit report may cause serious harm to your chances to obtain a mortgage.  Other typical forms of credit, which are evaluated, are:  Auto loans, installment loans, student loans, revolving accounts, or any other recurring monthly obligations.  Certain adverse credit items such as bankruptcies, judgments, or open collections make it more difficult to get a mortgage loan.  It is best to consult your loan officer with specific details prior to purchasing a home, especially if you have a credit score under 620.  It can be better evaluated and a game plan can be determined ahead of time.