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Understanding Mortgages

Mortgage Application Factors: Part 2

So you are working with one of our RMS Loan Officers, and you understand how your credit plays a part in this application puzzle. The next piece is your income and employment and your assets.

Application Factor – The Income and Employment Piece of the Puzzle

The main factor with your income is consistency. When reviewing an application, your RMS Loan Officer will want to see that you have a steady source of income, and will take the following items into consideration:

  • How is your income determined? Hourly, salary, commission-based, self-employed, or guaranteed monthly incomes from social security, or pensions/retirement.
  • You will be asked for tax returns, proof of employment, or other specifics.
  • They will also want to know the name of your current employer, what your position is, how long you have had that specific job and how long you have worked in that industry.

The main factor with your income is consistency. Your Loan Officer wants to be sure you have a steady flow of income to demonstrate your ability to consistently make your mortgage payments on time. For example, if commissions represent a significant percentage of your overall income, they will want to see a history that demonstrates consistent month-to-month commission income over time.

Why is this important? Using the income information you provide, your RMS Loan Officer will calculate your debt-to-income expense ratio, or DTI. This directly relates to how much you qualify for and can afford to pay each month. To get your DTI divide your monthly debt by your gross monthly income. This will be the percentage of your money that can go towards your debt and monthly mortgage payment.

From here, it’s up to you to decide how much you are comfortable paying each month considering your total household budget. Then, your RMS Loan Officer will work the numbers to give you a working home purchase price range.

Once you settle on a number you’re comfortable with, your Loan Officer will work the numbers backwards to draw up a plan from the monthly payment to what the price of your home might look like so you can go shopping for homes in that price range. Do not get discouraged if you feel you need to adjust your comfort number or even the area you want to live considering home prices you find. Adapting to the market is often a part of the process and it may take some time to find the right home, but your Loan Officer will always be there to guide you as you consider a full range of options.

Application Factor – The Assets Piece of the Puzzle

The last factor in the application puzzle is understanding your assets. Assets are sources of money other than your employment income that you can use towards the down payment and closing costs on your new home. When your lender is reviewing your bank statements, they will look for other liquid assets as well as your employment income.

Different types of assets:

  • Cash available in your checking and savings. Keeping funds in these types of accounts allows you to make deposits whenever necessary and it’s easy to access your money when needed. Because all funds being used towards a mortgage loan need to be verifiable, you should be careful about making any large out of the ordinary deposits. Lenders want to make sure you are not taking on additional debt to use towards the purchase of your home (for example -- by borrowing money from a friend or family member), so if they see an unusual deposit into your account, they will need to verify where it came from.
  • However, if you do want to receive help for a down payment, you can choose to utilize gift funds from a relative as an asset. It must be a true gift with no expectation or requirement for repayment of those funds. It’s best to establish the gift funds in your account as early as you can to move the loan process along quicker, but make sure you have the proper documentation to evidence the transfer of gift funds.
  • Buyers can also choose to take advantage of any retirement funds they have saved. Using your retirement account could change your plans for the future, but if drawing from other assets is not an option, the pros might outweigh the cons for this scenario. If you do decide to withdraw funds from your retirement there will usually be a tax associated with it, so make sure you are aware of that as well and consult a tax professional for further information.

Buying a home is a life milestone people save towards; it is always a good idea to be on the lookout for places in your life where you can save money. Every little thing can add up over time, so your future self will thank you for any spending you can cut back on now.

We hope this information about Mortgage Application Factors has been helpful and gives you a better understanding and confidence level as you proceed with your home financing journey. If you missed the last couple of blogs, you can follow these links to learn more about the other key components of the home financing process: Why Choose an RMS Loan Officer and Part 1 of the Application Factors. As always you can reach out directly to your local RMS Loan Officer, who will be happy to answer any additional questions you may have.


Understanding Mortgages

Mortgage Application Factors: Part 1

Last week we went over why you should choose an RMS Loan Officer. The next piece of the puzzle is the application. At first, it can be difficult to wrap your head around all the mortgage terminology and which loan program would be the best fit for you.

We want to help prepare you with everything you need to know before taking the next step to apply. Our experienced Loan Officers will be there to guide you home every step of the way.

The information our Loan Officers are looking for to start the application boil down to three main categories: your credit, your income and employment, and your assets. They will need a feel of your relationship with money to gain a full financial picture. This will aid them to lead you down the path that best suits your personal needs.

Application Factor – The Credit Piece of the Puzzle

The first major piece to “the mortgage puzzle” is your credit history. The Loan Officer will obtain a credit report that includes information from all three credit repositories, Equifax, TransUnion, and Experian. This information will help determine what the best course of action will be moving forward with your loan application.

What Determines a Credit Score

Credit scoring is an easy way to measure the amount of credit you have and have paid on time. Generally, credit scores will be in the range of 400-850. The higher the better. A common concern for first-time home buyers is how their credit score will play a factor into the mortgage process if their score is not quite what they would like it to be.

Your overall credit history is analyzed to compute your credit score. The type of loans that factor into your credit score include:

  • Student loans
  • Credit cards
  • Car loans
  • Past and present mortgages

The credit report also provides information on:

  • How long you had debt
  • Amount borrowed
  • Monthly payment
  • Payment history

You should be aware that any negative information on a credit report like bankruptcies, foreclosures, or judgements are also factored into the credit score.

It is always a good idea to monitor your credit so you can stay aware of your financial standings, remind yourself to be smart with your money and be prepared when the time comes to apply for a loan.

Credit Scoring Models

You can get your credit score by looking at one of the many credit score monitoring companies like Credit Karma, but this only provides what is called the consumer credit report model, which rarely tells the whole story.

Banks and mortgage companies use a different model called a risk-based credit score which gives more insight into the information they need to assess the risk associated with giving out a large amount of money.

It is normal to feel hesitant about someone pulling the risk-based credit score because it will be lower than the consumer report you are used to. It provides more in-depth information, so it will usually be lower for everyone. All-in-all, the difference between your loan officer pulling your credit report versus you obtaining a report typically will not affect which loan option you proceed with in the end. Educating yourself about credit history will make you feel more confident about making financial decisions.

Rest assured, when working with an RMS Loan Officer you can be confident in trusting they always want the best for you and their expertise will guide you to a plan you will feel comfortable with.

Be on the lookout next week as we continue our Mortgage Application Factors education. We will discuss the importance of income, employment and assets in association with a mortgage application.


Understanding Mortgages

Gift Funds: What You Should Know 

Paying the down payment on your new home can sometimes be a hefty sum of cash. It can be a great start and comfort if you have a family member willing to gift you money to help you purchase your home. Gift funds given by a blood relative, fiancé or domestic partner can be used as an asset to help with the costs of a new home purchase. 

The Donor 

This is the person gifting you the funds. They must prove that they are able to fully gift you the payment with no intention of getting any money back in return. This proof of ability can be a copy of their bank statement, a copy of the canceled gift check or a signed letter from their bank attesting to the availability of funds in their account. Be aware that more than one of these items showing proof may be requested as the decision is always up to the underwriter’s judgement, and they might require multiple documents.  

The Gift Letter 

Once the underwriter deems your donor fit to gift you the payment, they will be sent a form to complete and sign. It will ask for information such as the donor’s name, address and relationship to you, along with their account details, the property being purchased, the dollar amount of the gift, and the approximate date of the gift transfer. Finally, they will need to sign a statement agreeing that the funds are purely a gift with no expectation of repayment. This is especially important as this is not a time you want to be taking on more debt since that could affect your loan application.  

The Amount 

Some loan programs specify if the gift amount is over 20% of your loan value then there is no limit and will allow for the entire down payment to be in the form of a gift. Others may require that you pay at least 5% of the purchase price yourself unless the total down payment is 20% or more. It is also important to note that gift funds cannot be used to support loans for investment properties. Gift fund guidelines can change over time so stay in touch with your loan officer to make sure you are familiar with the latest regulations, and how this option can best support your unique home financing needs and circumstances.    

The Transfer 

The documentation of the gift fund transfer is a crucial step in the process. If the donor gives the gift in the form of a check, be sure to make and keep a copy of the check, and to deposit it in the account being used for verification of funds. It is essential that this deposit is made separate from any other deposits. This allows the funds to be easily identified later on your account statement, and matched to the agreed upon amount in the gift letter. 

To keep your home financing journey on track, and avoid any unnecessary delays, always make sure to carefully follow the most current gift fund guidelines, and to deposit any gift funds into the proper account as soon as possible. And, for the loan underwriting process, make sure you retain all the proper documentation related to any gift funds you do receive.  

  


Understanding Mortgages

Is an FHA 203k loan for you?

Whether you're looking to make some modest updates in the bathroom, or a major overhaul of a kitchen in severe need of modernization, home renovation allows you to put your own personal stamp on your home. In a way, the assembly process is akin to Play-doh - you can shape it, mold it and recreate it in any number of ways, all guided by creativity, imagination and skilled handiwork.

If only the cost of a home makeover was in the same range. Depending on the material used and the magnitude of the restoration project, home renovations can cost tens of thousands of dollars, an amount that few families have readily available.

That's where an FHA 203k loan can make sense. You may have heard of this mortgage offering before and wondered what it was all about. Well, wonder no more. Here are more details about this loan product and how you can use it to design your new house into the dream home you've always wanted.

What is an FHA 203k loan?

When you're in the market to purchase a home but would like to also do some rehab work in the process, an FHA 203k mortgage may be just the product that can help. Backed by the Federal Housing Administration, this loan variety has been around for well over 30 years, but has received renewed interest recently - since the early 2000s - due to the popularity of television programs like "Fixer Upper," "Flip or Flop" and "Property Brothers." In these shows, the hosts may participate in the physical labor portion of rehabbing an existing home or document what the process is like with a different couple in each episode. Viewers get to witness just how beautiful a home can be when you have the resources to make the desired adjustments and seek to replicate what they've seen on TV.

What these home improvement shows don't typically detail, however, is how the projects are actually paid for. While there are a variety of mortgage products that can make sense for home renovation, an FHA 203k loan is among the most popular, particularly among new buyers by allowing them to buy and restore a house with a mortgage that's rolled into one.

What are the qualifications needed for an FHA 203k loan?

Applying for such a mortgage is a fairly straightforward process and requires the type of documents that you would need for most other home loans, These include two years' worth of tax documents, Social Security information, pay stubs from your employer that corroborate how much you earn, a copy of your credit report and a bank statement that details the funds you have available. This paperwork is needed, of course, to ensure you have the financial capability to borrow money that will pay for the home and accompanying renovation work.

Those who are new to the housing hunt often assume that they need to come up with a large down payment in order to buy their house. Given that FHA 203k loans are often more extensive than a standard VA mortgage or USDA-RD mortgage, you may think a 20% down payment is mandatory. It isn't. In fact, you can pay as little as 3.5% down and still be approved.

It's difficult to say with precision the kinds of qualifications you will need in order to get the go-ahead, largely because each applicant is different, as are the plans in place for renovating a property. Generally speaking, though, your credit score should be higher than 640 and you'll need to be current with your other major expenses. For instance, if you're delinquent on any federal tax debt, this could complicate your eligibility. You also need to be a U.S. citizen or an eligible non-citizen and not experienced foreclosure on any loans within the past three years.

Are there any other requirements?

Just as your financial standing entails a formal review process, the same can be said for the project you'd like to have completed. For example, FHA 203k mortgages break down into two categories: limited and standard. The latter of these - standard - requires that the renovation cost no less than $5,000 and that it be overseen by a consultant who's affiliated with the Department of Housing and Urban Development. A limited loan is typically used for smaller projects and provides for financing up to $35,000.

There are also general rules that serve as guidelines for what FHA 203(k) loans can be used to pay for aside from the property itself. Here are a few bullet point examples of what the funds can go toward, as detailed by NerdWallet:

  • Install or replace flooring, be it hardwood or wall-to-wall carpeting.

  • Repair, restore or overhaul ceiling or the roof.

  • Introduce new plumbing, electrical or sewer systems.

  • Enhance aesthetic appeal to improve physical features and resale value.

  • Increase energy-efficiency with green-friendly installations and appliances.

  • Most exterior modifications involving landscaping.

However, some major renovation projects may be outside of an FHA 203k loan's purview. For example, if you want to install an in-ground pool, this mortgage product typically doesn't allow for such a project. Similarly, outdoor kitchens usually aren't eligible. It never hurts to ask, though, so speaking to your lender is the best way to know for sure.

What is the maximum amount you can borrow?

FHA 203k loans vary when it comes to how much the mortgage will actually pay for in order to purchase and restore a property. That will depend on where you live as well as your financial capabilities and where your would-be property is. For example, in some counties, the maximum loan amount is cut off at $356,362, but in others, it may be as high as $822,375. Again, you'll want to talk to your loan officer to find out for sure.

Things to keep in mind

There are many working parts to an FHA 203k loan. In addition to your mortgage provider and the party you're actually buying the property from, you're also dealing with the company that will be in charge of the renovation project itself. It can get confusing. Here are a few key elements to remember to keep everything straight.

Need to hire licensed contractor - Generally speaking, you can't be the one who is making the home improvements. A trained and officially licensed contractor needs to do the labor. It's always best to leave fixes to the experts, especially since the updates are designed to make the home more valuable.

Project must be finished within a prescribed period - Another advantage to hiring a professional is timeliness. Your lender will work out a schedule for when the project will begin and conclude, but most require it to be finished within six months. 

Must use property as a primary residence - FHA 203k mortgages are designed exclusively for those who are upgrading a house that they will live in, so flippers and other real estate investors may have to seek a different loan product. It also usually is for rehabbing a single-family residence as opposed to a condominium or townhouse. 

If this sounds like a mortgage that is in keeping with your homeownership goals, Residential Mortgage Services can help you get there. Contact us to find out more about this and other renovation mortgages.


Understanding Mortgages

Who is eligible for VA loan benefits?

The men and women of the U.S. military represent the best of America, whether they’re on active duty or career-retired veterans, newly recruited or long-tenured. They chose to enter the armed forces by their own free will and for that, the country owes them a profound debt of gratitude for serving in one of the most difficult jobs around.

One way of giving back is by making it easier for current or former service members to achieve homeownership, and many do so by leveraging U.S. Department of Veterans Affairs (VA) loans.

What makes VA loans so advantageous? Several things, but chief among them is a borrower’s ability to buy a house without a down payment. Many active duty and veteran service members take full advantage of this perk. Indeed, based on the most recent figures available from the National Association of Realtors, more than 40% of active-duty and career-retired veterans fully finance their house. And that's just one of the variety of benefits that current and former members of the military get when they take out a VA loan. These types of loans are by far the most popular mortgage product among military members past and present.

You may wonder what the qualifications are to be eligible for such a loan. If you're in the military or retired military and looking to buy or refinance, how you answer the following questions should provide some guidance.

How many days of active duty service have you acquired?

There are two ways of answering this question, and it depends on whether the period is considered to be wartime or peacetime. If you apply during a period in which Congress has made a formal declaration of war — as stipulated in Article I, Section 8 of the U.S. Constitution — you're eligible after serving 90 consecutive days on active duty.

During peacetime, on the other hand, the consecutive-day tally required is longer — 181 days, slightly more than double the wartime amount.

Perhaps you're in the National Guard or Reserves. Since most members of the National Guard are on standby mode and only enter active duty when they're called up, satisfying the requirement is a little different. If you've been in either the National Guard or Reserves for six years or on active-duty for 90 days between Aug. 2, 1990 and the present, you should be able to fill out an application form without any issues.

When did you serve?

Maybe your days of active duty are in the rearview mirror and you're wondering how many consecutive days of service you need to satisfy. If you visit VA.gov, you'll see a chart that breaks down the minimum active-duty service requirements to get your Certificate of Eligibility (COE). As you'll discover, a significant portion of America's history has been spent in wartime, thus the consecutive days of service stipulation is shorter.

Are you the spouse of someone who died while serving?

Unmarried surviving spouses are eligible for a variety of benefits. This includes VA loans, if your spouse died in the line of duty or from a disability they sustained as a result of their service. You may also be able to apply if your spouse is a prisoner of war or missing in action.

If any one of these requirements apply to you, a VA loan could be yours. You signed up for the military; make this the time to sign up for a VA loan. Contact us at Residential Mortgage Services today. We're here to serve you. You can get in touch with us via email or phone if you have any questions or concerns related to eligibility as a veteran, military spouse or active duty personnel.


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