What Mortgage Companies Look For
Think you are the perfect borrower? Good credit isn’t the only thing mortgage companies are looking. First mortgage companies want to see a minimun of 680 for the mid score of your three credit scores. But they look for a lot more than just credit. In fact, in many instances compensating factors can make up for a poor credit score. So what are the other major factors a mortgage company looks for? Steady employment, consistently high income, and liquid assets.
Steady employment means a mortgage company wants to see you employed in the same job or same line of work for two years or more. Obviously a mortgage applicant with a new job every two months is less attractive looking than another applicant who has been with the same company for 10 years. And some jobs are less attractive looking than others. For example, loan officers and realtors can have a difficult time getting mortgages. Presumably this is because they have a deeper understanding of the loan process and therefore are more likely to manipulate it. Thus mortgage companies require higher standards before lending to these types of applicants. Members of the clergy can also have difficulty obtaining loans. And obviously the unemployed have a particularly difficult time obtaining low cost loans. What’s more surprising though is that retired people can have trouble getting loans sometimes. Another group who has more difficulty is the self-employed applicant. The self-employed will usually need to document that they have been self-employed for a minimum of two years. Usually a business license or a letter from the applicant’s CPA will suffice as documentation. In the case that neither of these can be produced, a small number of lenders will allow more creative types of verification such as letters from the applicants customers or suppliers.
After they examine your employment, a mortgage company will examine your income. They like to see consistent monthly income. Usually they will look at your paystubs and W2s. Some mortgage companies will average your income from the past two years and then determine your average monthly income. Other companies will use their own formulas. Overtime, bonuses, and commissions may not be counted fully in your monthly average. Mortgage companies try to determine what it is you are really bringing in every month. They look at your gross monthly income not your net. Once the gross monthly income is calculated, they compare it to a few of your monthly payments: housing, installment loans, and credit card payments. Basically they are looking at your proposed mortgage payment and any other monthly payments showing up on your credit report including alimony and child support. Now they calculate your debt to income (DTI) ratio. Most lenders are looking for a ratio below 40 percent. Some require a lower DTI and some go as high as 55 percent.
Next, a mortgage company looks at your assets. Here they want to see that you have liquid assets you could immediately access should something happen. For example, if you lost your job, would you be able to make your mortgage payment until you found a new one? Most lenders want to see a specific minimun in your checking or savings account. Usually that number is 6 months of your full mortgage payment (the new payment the new loan will give you; not what you are currently paying). That includes taxes and insurance for all six months. Mortgage companies will typically only count about 70 percent of a retirement account. This is because of the additional taxes and penalties you will likely pay if you access the money early. Mortgage companies refer to your assets as reserves. And they typically want to see that these reserves are “sourced and seasoned”. This means that they want to see that you have had the money for at least two months. This way they know that you didn’t just borrow the money from a relative and will give the money back as soon as the loan closes.
There are few borrowers who apply for a mortgage and meet all of these qualifications perfectly. So the important thing is to show the mortgage company the entire picture. Your loan officer can help you do this. So your best bet is to be entirely upfront with your loan officer and help him or her to package your application in the most attractive way possible.
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