4 Simple Ways to Become a Qualified Borrower
NMLS #1324721
Trying to wrap your head around what is a mortgage, how do you know if you qualify for one?
These 4 simple ways will put you in the right direction and one step closer to funding your real estate deal. Regardless of the loan program you choose or qualify for these are the 4 elements every underwriter looks at when deciding if you are in the right mortgage program or not.
It's time you got the answer to your questions on how you can qualify for your first or next purchase or refinance.
1 Credit
What is the character of this borrower and can they pay from past experiences?
Different programs for different type of borrowers will be dependent on your credit score. This determines whether or not you will qualify or disqualify for the program or if the underwriter needs to pay extra attention to your file.
Part of your credit is not only your credit score, but what is on your credit.
Think of it like this...
Your credit report is the risk profile the underwriter takes into account when figuring out if you're "worthy" enough of the risk the lender is willing to take by giving you a home loan.
Even if you are a business owner (majority stakeholder) looking to purchase investment properties under your business, your credit is pulled and plays a part in determining whether or not you qualify.
Some of the things an underwriter looks at are:
- Scores
- Collections (with some FHA programs)
- Mortgage Lates
- Bankruptcy or short sales
- Other real estate listed on credit report
- Monthly debts (helps with determining DTI)
- Do you have student Loans (can be in deferment, but a monthly payment is still a part of your DTI))
2. Capital
Do you have the ability to repay in the future?
Majority of the mortgage programs, you have to have money for down payment, closing costs, the ability to show reserves (money you can access), and a form of income. Each of these factors can also affect your DTI (debt to income).
Debt to Income is the sum of your credit cards, personal loans, car loans, other loans, you pay monthly divided by your monthly GROSS income. If your ratio is too high you will be considered an at risk borrower and will cause a red flag in the system.
Not every program requires you to have a down payment, reserves, or even a job! The great thing you will learn about the mortgage industry is that there are loans that can fit your circumstance. You have to be willing to talk to a professional (loan originator like myself) that can look at your situation and understand what programs are available to help you find a fit.
3. Appraisal
Is the house worth the price we (the lender) is willing to lend you to purchase or refinance your mortgage?
There are two main things an underwriter is looking at on an appraisal.
1. How does the value of your house compare to recently sold homes in the area?
2. If you are renting, what are the current market rents and can it cover the proposed loan amount?
The value of your home or potential property affects your LTV (loan to value). Loan to value is a ration of your proposed loan divided by the value. So if you have a proposed loan of $500,000 and the value of your home is $650,000. That means your loan to value ratio is 76.92%.
If your home appraises for less of the value, then you have what is called negative equity, further adding risk to your loan profile. Rule of thumb is if you are purchasing, buy in neighborhoods where it is known to appreciate in value because ultimately it effects your LTV.
4. Title
Is there anything holding you back or needs to be paid before you can proceed with obtaining this loan and property?
Underwriters look to see if the property is located in a Flood zone (if so, you would need flood insurance), are there liens that need to be paid, city or state taxes or liens, encumbrances that hold you back, judgments, and other factors that may have to be paid before (or at closing) so you can have a clean title transfer and can close.
There are many things that go into helping you get approved for a loan. Although these are the 4 main elements that make up your loan, every loan scenario is different. As a loan originator it is my job to "paint the story" of who you are and what your goal is to the underwriter so they understand the why and what behind your loan.