Qualifying for a Mortgage Today
This has to be the point of most confusion for everyone involved in buying or refinancing a home today. The mortgage crisis is now several years old and the rules have been settled. I'll try to cover the basics here but please realize that the subject is too complex to go into much detail.
Debt-to-Income Ratio Trumps Everything
This is the most important aspect of the qualifying process so let's start here. Known as "DTI", the borrowers Debt-to-Income ratio trumps all other criteria when it comes to qualifying. As a general rule, a borrower's monthly debt should not exceed 43% of their income.
Monthly debt includes Principal, Interest, Taxes & Homeowners’ Insurance plus HOA Dues & Private Mortgage Insurance if applicable on the house they are financing, plus all the recurring payments listed on their credit report. This would typically include car payments, minimum credit card payments, student loans, etc. It does not include: utilities, health or life insurance, or any other type of personal expense. Fannie Mae and Freddie Mac's automated underwriting systems sometimes approve loans with DTI's up to 50% for very well-qualified borrowers.
Calculating income for employees is fairly simple. It includes wages or salary. Bonus and commission income can be used if it's been consistently received for at least the last 2 years from the same employer. Self-Employed borrowers must supply their past 2 years Federal Income Tax Returns. In most cases the income will be averaged over two years. A Year-to-Date Profit & Loss statement is necessary too. Although the Income Analysis procedure is standard among lenders, discrepancies such as large variances from one year to the next must be explained and an underwriter can always condition for more documentation. It's always best to review the tax returns with a mortgage professional very early in the process. There is no getting around the tax returns. Not only will the returns be required, but the lender will also independently verify the tax returns by ordering a copy of the tax transcripts directly from the IRS.
Assets: must be sufficient to cover the down payment, closing costs and cash reserves must be verified with 2 months statements from each account. Jumbo loans typically require higher cash reserves after closing than FHA, Fannie Mae or Freddie Mac loans.
Credit: minimum credit scores vary by lender and loan program. Fannie and Freddie give the borrower a bonus if the score is above 740 and the Loan-to-Value is below 60%. They will approve loans with scores as low as 620 but the price goes up as the credit score goes down. Most Jumbo lenders require a 700 score but some do permit lower scores.
The Bottom Line:
· Income must be documented and be sufficient to qualify
· The borrowers Debt-to-Income ratio is far and away the most important criteria.
· Additional cash reserves and a large down payment are helpful but even a lot of money in the bank or a large down
payment may not compensate for a DTI that is too high.
· Good Credit is helpful but that alone won't suffice without a DTI that meets the guidelines.
· Pre-Qualification of every borrower by a mortgage professional before buying is highly recommended.