Navigating the mortgage process
Posted October 12, 2014 1:33 p.m. EDT
By Alvaro Casella, Caliber Home Loans
The mortgage process can seem overwhelming these days; however that doesn’t need to be the case if you follow some basic steps. A mortgage is typically made up of 4 major components: income, collateral, credit and transaction. Each one of these components has certain elements that need to be addressed.
Income verification guidelines have changed over the years. Typically income is verified through W2’s, paystubs and tax returns for most borrowers. It is important to share all sources of income during the loan application process, as an IRS transcript will usually be requested by the lender. The IRS transcripts should be the same as the income that is being disclosed on the loan application. On occasions we will see certain items on the IRS transcript that can reduce qualifying income. A couple of the more frequently seen income reducers are unreimbursed business expenses and running a small side business that produces a net loss.
In addition to establishing the dollar amount of income, it is important to understand that a loan will usually consider the last 2 years of historical income along with the probability of the income continuing into the future a minimum of 3 years. Exception to the 2 year historical rule might be an individual who was in a formal education process such as a school, college or university.
Not all collateral is the same… A single family detached home is not the same collateral an attached home, condo, multi-family home or manufactured home. All are eligible collaterals, but have different guidelines to follow. In addition it is important to understand that all properties need to meet minimum property standards. Should a property not meet the minimum property standards, it would need to be corrected prior to closing or use a program that would allow for the repairs. Examples of a program that would allow for repairs would be an FHA 203k, renovation loan or a repair escrow.
The credit piece of the loan process has many opportunities to derail the loan process. Perhaps most important of all in credit is the score. While each lending institution has a different minimum on credit score requirement, it is important to understand that any transaction involving a score under 620 will require additional steps and scores below 580 will be challenging to fund at all. Disputed accounts must have a resolution, if you have disputed an account, make sure that the situation has been resolved whether in your favor or not. A credit report with an active dispute will usually prevent a final loan approval. Authorized user accounts will potentially also create additional documentation needs for borrowers with limited credit.
The good news is that credit reports are much easier to obtain and errors can be uncovered and corrected much quicker than in past times. The key is to identify early any errors, as they can still take 30 to 60 days to correct.
The transaction is what brings together the first 3 components: income, credit and collateral. This is where the loan is reviewed for consistency. Things such as distance to job, size of home compared to size of family, location of 2nd homes (leisure destinations) all can have impact on how the transaction is viewed by the underwriter. A letter of explanation, as it is referred to in the industry, is key and will always help explain the transaction through the eyes of the borrower versus having the underwriter assume what the transaction is.
The topics covered seem basic, and in many respects they are; however working with an experienced loan officer is key to navigating the loan process from an offensive position. There are many lenders and loan officers to choose from. When selecting a lending institution, look for a company that services their loans, has a full offering of loan products and internal underwriting and processing. This will assist in reducing underwriting overlays (which is common among non-servicers) and can constrict underwriting guidelines.
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