How to Prepare for Mortgage Application

Post Updated 06-23-20

If you are thinking about applying for a mortgage loan and you have not taken the time to look at your financial situation, then the time to do so is before you go to the bank or mortgage company. Listed below are some mortgage facts and that will help you prepare.

Preparing yourself will definitely keep you from the hassles that can occur if you are not prepared.  It is best to have some idea of what you can qualify for before you go.  It is not complicated if you want to make sure you are financially ready for a home loan.

Be Informed and be wise!

Some Things to Consider:

First, you should know what your credit looks like:

Depending upon the type of mortgage loan you are considering, you need a credit score at a minimum of approximately 680 or higher for conventional loans and approximately 620 for Government-insured loans; FHA/VA.   FHA’s rule are somewhat lower, however, most lenders want to see at least a 620 score. This should be your middle score, meaning the mortgage company will pull a tri-merged credit report and your middle score is the qualifying score.  If there are two borrowers; the lowest tri-merged score is used of the two.  The three major bureaus are; TransUnion, Equifax, and Experian.

The higher your credit score, the better offer you will receive.  The lower your loan to value is the better loan offer also.

There is actually no way to say definitely what score the AUS (automated underwriting system) will take because your approval is based upon other factors as well as your credit.

The loan to value plays a part, funds for closing and reserves after closing also play a roll in whether your loan will be approved or not. In conventional loans, (those not guaranteed by Ginnie Mae), if you have at least 20% down-payment, you do not need mortgage insurance, and those funds may be gifted. This lowers your payment significantly.

It is best to have minimal other obligations.  Know how much you owe versus your income, and when you will have your accounts paid off.  The less debt you have, the better off you are as long as you have a credit history of at least 24 months.

Again, this may vary depending upon the type loan, FHA, VA, or Conventional.

Non-traditional credit may be verified for further evaluation if you do not have sufficient trade-lines as well.  There should be at least four trade-lines on your credit report.  If you currently rent, your rental may be verified manually or obtained by the bureau.

Recently Opened Accounts

You are obligated to tell the Loan Officer about any new debt you have that may not show on the credit report.  Recently opened accounts must be disclosed.  Recently opened accounts are evaluated to make sure the down payment is not borrowed. If this is the case; this is only allowed if the loan is secured by a marketable asset.   

Debt to Income:

Your debt to income is important.  This is figured by taking your total debts that are extending beyond 10 months, include the pending housing payment plus taxes, insurance, mortgage insurance, and HOA fee (homeowners association fee, if applicable).

DTI Ratio Includes-

Housing Expense-

• principal & interest payment
• taxes & insurance
• mortgage insurance (if applicable)
• homeowner association fees (if a condo, pud)

Debts included-

• installment accounts
• revolving accounts
• child support
• any debt you may have that is not listed on the credit report
• alimony payments, and
• any debt on your credit report to include student loans, if applicable.

The total debts plus housing expenses should be 36% +- as a standard manual underwriting rule.  Desk Top Underwriter (DU- FNMA underwriting system, may allow a higher debt to income ratio)

The above standards can change with added reserves, excellent credit, lower loan to values, and other criteria within the loan. These are called compensating factors.

Loan amount

The above is only a scenario and a lot of people have other debts greater than $750 monthly.  This gives you an idea of where you might need to stand.  As I have stated, if the credit is good, money for a downpayment is saved and there are reserves; these debt ratios could be approved in certain circumstances.  It depends upon factors about your financial situation and the loan to value.  The lower the loan to value the greater possibility the ratios above will be suitable.

Funds for closing and Reserves:

Funds needed to close will of course depend upon the loan to value.  If you are applying for a Conventional loan and you are getting maximum financing, normally this means a 97% loan to value and funds would be three  (3) % down-payment plus the closing cost and prepaid items.

The three (3)% or five (5)% down-payment must be from the applicant’s own funds, depending upon the loan to value of 97% or 95%.  These funds may be gifted.  This means that you should have these funds in your bank account at least for the past 60 days.  Of course, if you are saving these funds from your income and this can be documented, this is acceptable.

The above guidelines are for single-family dwelling only.

You must also have the closing cost plus prepaid items which are usually at a minimum of three (3)% +-,  of the loan.  The closing cost and prepaid items (hazard insurance premium for at least the first year are paid at closing).

Prepaid items include,

• hazard insurance,
• interest from the date of closing until the last day of the month the loan closes, and
• tax reserves.

Closing cost includes but are not limited to:

• attorney’s fees (closing agent) which include title search and preparation of the paperwork.
• Title Insurance premiums, tax service fees, processing fees, origination fee, the discount fee (if applicable), underwriting, flood determination fee.
• A discount fee should only be charged if you have to pay a fee to get a certain rate.

Reserves After Closing:

Important: This will depend largely upon the debt to income ratio (DTI), loan to value (LTV), the product, credit score, and features of the loan. Also the number of units within the property. I have listed a single-family dwelling, (1 unit) requirement.

Desk Top Underwriting System – (DU) or (Loan Prospector-(LP), Freddie Mac U/W System) *Underwritten loans

DU or LP will determine the amount of reserves that are required based on your entire financial history. Credit Score, LTV Ratio, DTI Ratio, and loan product.  This includes the 97% loan to value products.

If you have excellent credit scores and your overall credit file is good you will not have any problems.

Most lenders use the automated underwriting system.

If your loan is being manually underwritten (u/w), (meaning u/w without the automated u/w system),

Loan To Value of 95% – 1 Unit -Purchase or Limited Cash-Out Refinance

• Your DTI is 36% or less, and your credit score is 680 with LTV greater than 75%- NO reserves are required. Zero reserves if LTV  is ≤ 75% with a 680 score.
• If your DTI is 45% or less and your credit score is 720 and LTV is greater than 75% – No reserves are required.
• If your DTI is 36%, Credit score is 620 and LTV ≤ 75% 2 months reserves are required
• If your DTI is 36%, and your credit score is 660 with an LTV greater than 75% – 6 Months of reserves ARE REQUIRED **45% DTI, 700 score >75%LTV = 6 months reserves **if DTI is 680 ≤75% – 6 months reserves still required.

The above requirements are for one unit owner-occupied residences only. There are additional parameters for Second Homes, Cash-Out Refinances, Investment Properties as well.

Know what fees are applicable in your area…some states have a state tax fee, some do not.  Shop around for the best Closing Agent (Attorney).  If you do not have hazard insurance already, get a quote.  You may want to shop for your hazard.  Never take the first quote, you can always go back to the lower quote if the others are higher.

Summary:

Know what your credit score is.  Know what your debt to income ratio is. Know what you should have in funds (liquid assets) for down-payment and closing costs.  If you are looking at an FHA loan, some of these funds can be gifted.  The guidelines have changed for FHA you can find these here.  Know what your estimated hazard insurance premium will be.  Know what the estimated taxes will run for the price house you are looking for.

**As stated there are many parameters to all mortgage qualification methods. This does not include all loan parameters as there is no way to add it all here. However, make sure the lender explains every aspect of the loan application and approval to you.