The mortgage industry has undoubtedly changed since the housing crash a few years ago. It used to be so simple to qualify for a mortgage — provide your basic information, sign a few papers, and move along!
Unfortunately, getting a simple, fixed rate mortgage these days through the secondary market isn’t always easy-breezy. There are many factors the lenders look at, and all of your most personal financial information must be reviewed in order for the lender to make a credit decision.
Some of the things the underwriters are looking for may surprise you, so here are 10 surprising facts about mortgages in today’s market.
1. Underwriters Don’t Care About Your Assets
While underwriters do want to see that you have enough money to cover your down payment, they typically don’t care how much money you have in the bank.
There’s a spot on a mortgage application for you to list your cars and other assets, but it really doesn’t matter to an underwriter because those things aren’t collateral for the mortgage.
The thing that matters the most is your income. What I mean by that is this: let’s say you have one million dollars in the bank, but you only make $10 an hour. You want to finance a $300,000 home. Even if you have enough money in the bank to cover the loan, you aren’t going to get that mortgage if you don’t qualify for it on your income. Your debt-to-income ratio is of the utmost importance.
2. Having No Credit Score Can Hurt You
You would think that learning to pay all of your bills in cash, saving up to buy your cars in cash, and not having a credit card and its corresponding debt would be a good thing when you are applying for a mortgage, but that’s not exactly true.
If you don’t have a credit score because you’ve always been good with your money and never utilized credit, then it will be much harder for you to get a mortgage than it would be for a person who has 5 credit cards, 2 car loans, and 7 student loans with a higher debt ratio.
Banks want to see documentation that you pay your bills on time and that you can handle having credit. This information comes to them in the form of a credit report, so if you don’t have a credit score, then you have to come up with different ways to prove to the lender that you pay your bills. This can make it tougher to get a mortgage.
There are very few loan programs that exist that allow you to use what’s called “alternate credit” to prove your creditworthiness. If you do qualify for one of those programs, you must find 3 different companies you use that are willing to vouch for your creditworthiness. Examples include your utility company (if they are in your name), your cell phone company, or your car insurance company.
3. Self-Employed Borrowers Are the Hardest to Qualify
Self-employed business owners are typically the hardest borrowers to get loans for because many business owners write off so much of their income, it looks like they’re bringing home nothing.
Clearly that isn’t always the case, but it’s the only thing the underwriters can use to prove income on a self-employed borrower, and they won’t overlook something as important as tax returns.
I once had a borrower come in who needed to borrow a substantial amount of money for his house. He supplied his tax returns because he was self-employed, and although I knew for a fact he made good money, he only showed $12,000 in income for the previous year. Well, I’m sorry Mr. Borrower, but there’s not much I can do for you there!
You have to prove your true income to Uncle Sam and pay your taxes if you want to prove to a lender that you can afford the home you want to finance.
4. Your Debt Ratio Isn’t Based on How Much Money You Bring Home
Your debt-to-income ratio (DTI) is actually based on gross income, not net income. That means your income is based off of the total amount on your pay stubs and W2s prior to taxes and retirement deductions being taken out.
If your debt ratio is higher than you’re comfortable with, it’s even higher when you compare it to what your debt ratio would be with your take home pay. (That’s also why it’s important to decide how much of a mortgage payment you’re comfortable with. Don’t just go with what the bank tells you you can borrow.)
If you have any questions never hesitate to get in touch.