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Credit Scores
With the heavy regulations and guidelines placed on lenders these days, they are extremely careful about approving loans for those people with borderline credit ratings. It is very important for a buyer to know and understand their credit rating prior to applying for a mortgage. The minimum requirement for an FHA loan is a FICO score of at least 620 with the minimum 3.5% down payment for the application to even be accepted by the lender. Conventional loans have an even greater minimum credit score requirement. If your credit suffers from some damage, be sure to actively repair it before applying for a mortgage so that the chances of approval are greater.
Delinquent Credit Obligations
Anytime a borrower has late payments showing up on his or her credit report, where they have paid their bills 30, 60, 90, 120 and sometimes even 150 or more days late, it creates delinquent credit obligations. With a frequent occurrence of delinquent credit obligations the person’s credit scores are severely damaged and mortgage options become highly limited. There is some room if this is something that has occurred in the past. Recent occurrences hurt credit scores the most but even then there may be some lending options for those borrowers. Underwriters are very wary of a pattern of bills being paid in a delinquent manner.
Bankruptcy Previously Filed
Depending on when the bankruptcy was filed, it can hurt a homebuyer in that it is a clear indication of a borrower’s lack of responsibility and ability to manage his or her own finances. Most lenders are not concerned with bankruptcies that occurred five to seven years ago if a borrower has re-established credit..
Previous Foreclosure
For homeowners who have not been able to maintain their mortgage payments on a previously-owned property, the chance of being approved for another loan will not come so easily. Understandably, mortgage consultants are extremely wary of those people who have previously foreclosed on a home. That is not to say that it would be entirely impossible to obtain a new loan. In some cases where there was a demonstrated hardship that has been overcome, borrowers may be able to obtain a loan – however not without proof of financial stability and viability.
Loan To Value – Appraised Value Versus Amount Owed Is Too High
Loan to value is the equation that depicts the amount owed on a home versus the value of the property, the higher the loan-to-value, the greater the risk to the lender. The typical FHA maximum loan-to-value for home purchases is 96.5%. However for a FHA guaranteed refinance, the ratio is either 85% or 97.75%. The typical conventional loan-to-value guideline dictates a value of above 80% and requires mortgage insurance or a 2nd mortgage. Most lenders will not go above 95% loan to value for conventional loans plus the lower the credit score the lower the loan to value restrictions.
Debt ratios – Too Much Debt Versus Income
The amount you earn versus the amount you owe and the corresponding ratio is called the income-to-debt ratio. The standard expectation practiced by banks is that the amount owed should be no more than approximately 45% percent of total gross income. The types of debt they take into consideration in this case are student or personal loans, credit card debt or other monthly financial obligations such as car payments. You can use this calculator to figure out your debt to income ratio and whether you need to work on it prior to applying for a mortgage.
Unstable Work History
Lenders need to be able to verify income that they can count on. If you have an unstable income history that is not verifiable or consists of several short-lived durations, it demonstrates the inability to maintain long-term employment. The mortgage loan officer will be looking for demonstrated reliability when it comes to making payments month after month.
Funds To Close – Not Enough Documented Funds
If an applicant does not have enough funds on hand to close on the property, it raises a red flag for lenders. In addition to a down payment, you will need funds to cover a lending fee, appraisal fee, closing costs, earnest money and documentation and/or processing fees.
Tax Returns – People Have Outside Businesses That Lose Money
In light of the recent tightening of lending practices, increased scrutiny and intense attention to detail during the mortgage application process – lenders are now requiring tax transcripts to be obtained directly through the IRS. This corroborates that the buyer is being truthful and that the tax documents provided are consistent with those obtained from the IRS.
Owning Too Many Properties
The liability of owning one or more properties can lead up to a significant amount of risk for lenders and end up being too close for comfort. Unless there is a sizable amount of income that demonstrates the ability to maintain the properties, most mortgage underwriters would rather avoid dealing with the risks at hand of engaging with multi-property owners.
Insufficient Funds – Overdraft Charges On Bank Statement
It goes without saying that evidence of insufficient funds would turn away a mortgage loan consultant because it clearly shows the lack of responsibility on the part of the applicant. Frequent overdraft charges is yet another serious delinquency that would scare away any creditor, let alone one considering lending such a large amount for a home purchase.
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