Monday, March 5, 2012 / by Ira Miskin
Our Team speaks with more than a hundred new prospective buyers each month. And among the important questions we ask each caller is, "Have you spoken with a lender to see what mortgage amount you qualify for?" That question has two meanings. First, does the caller know whether their personal financial picture is clear and bright, or murky and marred by low credit scores, a recent bankruptcy or foreclosure or other credit defaults. Second, if they seem to have a pretty healthy credit history, just how much does their current financial structure indicate is an appropriate amount for a lender to provide which the Buyer can comfortably pay back each month?
When we ask that all important question, meant to help buyers begin this fundamental first step in the home buying process, we can often feel the chill it causes on the other end of the call. We know that asking the financial qualifier question means making a commitment to the home buying process some callers are not yet prepared to make. But we also know there are many aspects of the home buying process we can help buyers sort through and successfully complete, including helping them get a clear picture of their financial strength as it applies to purchasing a home.
However, even after a buyer speaks with a qualified loan officer and gets a lender's letter indicating the lender's belief in the buyer's "bankability," that does not always mean the buyer will be able to purchase a loan. That's because the over-the-phone Q & A session with a loan officer is just the very first step in qualifying for a home loan. It can trigger what is called a "Pre-Qualification" letter indicating the potential bankability of the buyer - pending receipt of a long list of documents and explanations of past financial transactions that will be required to satisfy an ever-changing and constantly narrowing of the lender's underwriter's criteria for approving a home loan. The process is detailed, lengthy and more than occasionally frustrating for everyone concerned. But it is a critical and necessary part of buying a home so here is what we recommend.
Don't just get pre-qualified, get pre-approved. Pre-approval means the lender does believe you are bankable and will likely qualify for a home loan. Here is the list of documents one of our Team's Lenders require at the start of the loan process and before you begin riding around looking for your perfect home. This information is necessary in order to help buyers know you are justifiably qualified to purchase a home and won't have to face nearly as much scrutiny in the final underwriting stages of securing a loan for your new home purchase.
1. Most recent 2 year filed tax returns
A. Confirms they have filed returns on time; if they have not they will have to file. Avoids scrambling around to get returns files before closing.
B. Uncovers side businesses which may show a loss which will lower their income and buying power. Borrowers sometimes do forget about these businesses
C. Uncovers unreimbursed business expenses even for W-2 type employees. Borrowers are sometimes "unaware" of these write offs.
D. Uncovers whether or not they are actually W-2'd or 1099'd. Someone could work for a large company and think they are W-2'd but are actually 1099'd in which case we would need a 2 year history to show how much they write off because they are considered self-employed from an underwriting stand point.
2. Most recent 2 years W-2's or 1099's.
A. Again confirms whether or not they are salaried or contract employees and confirms work history.
B. Can also verify or disprove 2 year history or bonus and overtime if we are trying to use it as income to qualify.
3. Most recent 2 months bank statements This is the biggest area of concern
A. Shows any large deposits that will need to be sourced. If the deposits are cash and cannot be sourced (95% won't be sourceable) then we may need to wait a month or 2 for the funds to "season." If the deposit was a gift we can start documenting it properly.
B. Shows if the borrower has NSF charges. A lot of these can show financial mismanagement on the part of the buyer which makes underwriters uneasy.
4. Most recent 30 days of paystubs
A. Verifies hourly pay rate and number of hours worked. Borrowers often overstate their hourly pay rate if they work a little overtime or if they are giving the co-borrowers hourly rate.
5. Two year work history
A. Must verify most recent 24 month work history and identify any gaps in employment. If recently out of work force for over 6 months, then they must be on current job for at least 6 months to qualify for an FHA loan.
All this coupled with credit scores high enough to assure the lender you have a consistent payment history for everything from credit cards to your monthly electric bill gives lenders a reasonably clear picture of your credit worthiness when seeking a home loan. And now you are "Pre-Approved."
Remember, banks do not have to loan you the money you seek to purchase your new home.
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