The mortgage banking business is a huge financial industry based upon the conventional and government lending guidelines that have created a homogeneous product for investors who put their money in mortgage backed securities. The following guidelines are followed by underwriters who determine eligibility for conventional, jumbo, FHA and VA loans. The maximum acceptable housing and debt ratios, income required, cash for down payment and reserves as well as credit requirements differ from program to program and should be explained to you before you apply. The risk of default and missed payments is the primary concern of your mortgage lender. In a nutshell, If your loan goes into default, your lender usually can only recover about 75% of the value of the home. After three to six months of payments have been missed, selling costs, discounted price of the home and attorney’s fees, the average recouped principal is around 75% of the fair market value. If you are late on your payments, you restrict the lender from selling the loan on the market and re-lending that money to someone else. This hinders its ability to make fee income, a large part of most mortgage lenders’ income. There is a section on the Secondary Market you may want to read. These guidelines help to reduce risk to the lender and thereby make mortgage money more readily available to all prospective homeowners.

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Underwriters determine your income to debt. The amount of income and debt need to be verified. Lenders use a 2 year history of income to show stability and a 3 year future expectation of similar or improving income. The documents to provide are as follows. You should show one full month of pay stubs. If you get paid weekly, you need five pay stubs, every other week, three, and if you get paid twice a month, two. The preferred stub shows year to date income on it and is computer generated. Copies of handwritten paychecks are scrutinized. Two preceding year’s w-2 forms, although many lenders are accepting one as proof.

Tax returns will be required if you have income from commissions, bonuses, self-employment, notes, dividends, interest, or capital gains. You will need to provide two full years returns, ALL SCHEDULES, and the adjusted gross income will be averaged. If you have income from rental properties you may provide a one year lease or schedule E from your 1040s. Alimony and child support do not need to be reported, unless the income is necessary for approval. If you own more that 25% of your business, business tax returns, ALL SCHEDULES, need to be provided. The same goes for partnerships. Ownership is determined by a corporate accountant or your K-1.

Unverifiable Income: If your income is in cash, such as tips or is in some other way unverifiable, it cannot be used to qualify you for a home mortgage that requires income verification. You may want to look into a “no-doc” loan. These programs are many and varied and you need to understand the differences before you choose one.

The underwriter is looking for enough funds to cover all of the transaction costs and make sure you have money left over. Each loan program has guidelines determining how much cash reserves are required. The underwriter is also looking for your ability to save money. If your housing payment is going up considerably, known as payment shock, and you haven’t saved money, underwriting will have concerns about your ability to make the payments. There are several sources for funds that you can use. Obviously you can use any liquid funds in your accounts, like checking savings and money markets. Other sources of funds, if necessary, may be received from gifts and or loans. These sources should be discussed with your lender in advance so that you understand the lender’s requirements for proof. Stock sales and the sale or liquidation of an item also require proof. You will also need proof for the source of any large deposits, over your usual savings pattern. Lenders want to make sure you haven’t incurred any debts that might affect your ratios. If the lender’s guidelines permit it, you may receive a gift from a relative or a non-profit organization. Most lenders allow you to borrow money from a secured asset. See Creative Financing. You can usually use your 401k for reserves and if you need the money, a loan against it or liquidation of your 401k are acceptable. As proof, your lender will want three full month’s bank statements for each account, or one quarterly statement. The printed statement from the bank or financial institution, all pages, is preferred. A signed statement from the bank is sometimes used also, if no printed statements are available. Note: the lender will need to see that the earnest money check you wrote for the deposit has cleared the bank. This allows them to give you credit for that amount. Expect to get a copy of the cleared check for your lender.

The lender will run your credit report to determine how you pay your bills and the balances and minimum required payments for any debts you owe. How you have paid your mortgage or rent can be very important. Foreclosures and major delinquencies will be scrutinized. The lender will also be looking for your Credit Score. There are three major credit reporting agencies. Your credit is your responsibility. Occasionally there are misrepresentations on your credit report. Balance information, payment history as well as completely erroneous information can be reported. It is your responsibility to make sure the information reported is accurate. Only you can do this, and sometimes, if there are errors, it can take work to fix. Your credit is no more important to anyone but you. If there are late payments that occur in the last twenty four months, your lender wants to know why and will probably want it in writing. Major delinquencies as far back as seven to ten years that are reported need to be addressed. The underwriter wants to know that the situation that caused the problem was either an error or beyond your control.

They want you to take responsibility for the problem and to explain why it won’t happen again. Give details, if available. Most guidelines for A paper require two years after a bankruptcy discharge date to re-lend and many automated systems will not approve you within four years from discharge date. As with most things, time is on your side. If you take charge and borrow and pay responsibly, your credit will improve.

• Trans Union
• Equifax
• Experian

The lender wants to know the value and condition of the property you are using for collateral. Most of the time, the lender has more invested in it than you do. They underwrite based upon the worst case scenario. The worst thing that can happen is that you buy a home and never make a payment. Whatever condition that home is in at settlement is the best the lender can hope for when they turn around and re-sell the property after foreclosing. This is why the lender wants to know that the property is marketable. It meets the style and quality of homes in the area and is in good condition. Lenders don’t want to have to fix up a property to sell it. They make their money on interest and fees, not housing speculation. All kinds of things come into consideration when discussing value and condition as well as marketability. Mostly it comes down to this: does the home fit in with the neighborhood or is it an odd duck? Conformity sells.

This is the section you won’t read about anywhere else and is a large factor in this type of transaction. I have seen more deals come to fruition because of the motivation of the parties involved. A person who really wants to buy a house will get the cash he needs from any available source to make it happen. Realtors will move Heaven and Earth to remove resistance. Sellers, attorneys, title people, and lenders all need to work together and their individual motivations can make or break a deal. This is especially true when something does not go as planned, and there is always something that doesn’t go as planned.